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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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South Carolina's Jay Branum Says Captives Have a Bright Future

South Carolina Road Sign Against Blue Sky and Clouds
February 17, 2020

Just because a state has enacted legislation allowing the formation and licensing of captive insurance companies doesn't mean it will be successful in attracting and retaining captives, says South Carolina's top captive regulator.

While more than 30 US states have captive statutes, only a handful have a significant number of captives, says Jay Branum, director of captives at the South Carolina Department of Insurance.

Indeed, in a fair number of those domiciles there has been "no investment by the state and little, if any, traction in building a captive portfolio or a foundation of captive-specific knowledge and experience on the basis of which to attract the business," Mr. Branum said.

"There is simply no reason to believe that more than a few US-based domiciles will ever make the ongoing investments needed to achieve what any of us would regard as a 'critical mass' and thus earn a secure place among the more established and committed domiciles," he added.

By contrast, South Carolina has "a great deal to be proud about," he said.

Indeed, since 2013, the number of South Carolina captives has leaped, rising from just 118 in 2013 to 179 at the end of last year.

South Carolina captive parents, Mr. Branum said, come from a variety of industries with, as of the end of 2018, two-thirds of South Carolina captives coming from 3 industries, led by finance, insurance, and real estate, which had 43 captives, followed by health care with 39 captives and transportation with 30 captives.

In 2018, captives also varied widely by their premium volume, with the largest numbers of captives—74—having between $1 million and $5 million in premiums, followed by 34 captives with less than $1 million in premium volume and 30 captives with between $5 million and $25 million in premium volume.

At the higher end, 22 South Carolina captives in 2018 had between $25 million and $100 million in premium volume, while 8 captives had at least $100 million in premium volume, Mr. Branum said.

This year marks the 20th anniversary of the passage of South Carolina's captive statute, and during those years, Mr. Branum noted, the number of captives formed in the state has varied widely.

For example, between 2000 and 2004, 115 captives were licensed, followed by 100 captives between 2005 and 2009, with 50 captives licensed between 2010 and 2014 and 81 captives between 2015 and 2019.

As to why there has been such a wide variation of captive formations during those time slots, one reason may have been too much flexibility by regulators.

"During the first 5 years of our program, according to every version of that period that has been related to me, the consistent message from the top of our department was 'find a way to say yes,'" Mr. Branum said.

"If that's your mandate, you're inevitably going to license some rubbish companies, and some of them will blow up. And that's exactly what happened, producing an overreaction by some in the department during the next period of time, which was characterized by a restrictive regulatory approach toward captives," he said.

As South Carolina became recognized as less "captive-friendly" than other domiciles, captive licensing fell off dramatically, with the number of captives licensed between 2010 and 2014 well under half compared to the 2000 and 2004 time frames, Mr. Branum said.

But South Carolina captive growth has resumed. For example, the 81 captives that were licensed between 2015 and 2019 is a sharp increase compared to the 50 captives licensed between 2010 and 2014.

That growth has been aided, Mr. Branum said, by the stability of South Carolina insurance regulators. For example, Ray Farmer, the director of the South Carolina Department of Insurance, has held that position for more than 6 years, while Mr. Branum has served as the state's director of captives for more than 5 years.

Captives have a bright future because they will continue to be both a versatile and effective tool for their parents who, among other things, want to have more control over the costs of their risk management programs, Mr. Branum said.

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