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South Carolina captures captive insurance market |
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Right for your company?
Despite the advantages, captives may not be for everyone, industry experts say.
The process begins with a feasibility study.
“We meet a company and talk about what their goals and needs are, and whether or not a captive will meet those goals,” Newton said. The captive management firm will look at an estimate of what losses, costs and benefits will be. Then the firm helps the company design a business plan and the pro forma statements, and then sets up a meeting with the department of insurance — along with all the principals — to discuss the lines of coverage, how they will fund their losses and all the aspects of captive management.
If the department allows the application to go forward, the captive management firm will submit all the required documents: business plan, officer, feasibility study, business plan and copies of policies. Once the captive is licensed, the management firm will serve as a liaison to the attorneys, the insurance department, actuaries and other professionals involved in the captive’s operation.
South Carolina regulators eye this process carefully. “One of the most important things we look at is the parent to the captive,” said Jeff Kehler, manager of the alternative risk transfer division at the state Department of Insurance. “Is it well-funded?
“Companies that are suffering from serious cash flow issues or don’t have an engaged management that has a firm belief in and effective risk management loss prevention program in place, probably won’t be a good prospect to form a captive,” he said.
Kehler’s office also looks at the company’s plan of operation, whether it’s “solid” and whether it “makes sense.” Does the parent company have sufficient expertise and experience in business? Is there adequacy of loss prevention and risk management programs?
It is also important, Kehler said, for a company to select a captive manager and work with them to establish the service providers that are necessary to operate the plan.
Because of the specialized nature of the industry, the department has staff in two offices, one in Columbia and one in Charleston, dedicated solely to the captive insurance market.
Captives aren’t licensed to compete with the traditional insurance companies because “the difference in regulation would give captives an advantage, which would be inappropriate. We want to have a fair and equitable level playing field,” Kehler said.
“You also need a well-developed infrastructure. Forward-leaning legislation (in South Carolina) enables captive owners to get the most benefit out of their captives. I think we have a reasonable but prudent regulatory environment as well.”
Positive economic impact
The captive boom has brought a $20 million economic benefit to South Carolina, Kehler said, and an entire captive service industry that has mushroomed within the banking, legal, investment, actuarial and accounting industries.
Eight of the 10 largest captive managers have offices in the state. Among those is Marsh Management, which manages more than $21 billion in premiums each year. The company opened its office in Charleston in 2003. The captives USA Risk managed wrote about $500 million in premiums last year, and five or six are writing between $15 million and $25 million in premiums.
It’s clear, Kehler said, “if someone comes to South Carolina and wants to start a captive, everything they want is right here.”
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