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To The Point
North Carolina lax captive regulation could cause problems No fees, no exams, no form approvals—what could go wrong? By Michael J. Moody, MBA, ARM Over the past few years, there has been an intense rivalry developing in the captive community. One of the ways this has manifested itself is a significant growth in the number of domiciles. They see the number of "green jobs" that a state like Vermont has produced and the tax base that it has obtained. As a result, more and more states have enacted enabling legislation to become a captive domicile. With something north of 30 states now having decided on becoming captive domiciles, and this number continues growing every month or two, several issues arise for the captive community. That is why Rough Notes (February 2013 "Captive Concerns") conveyed its concerns in an article earlier this year. In the article we expressed our growing anxiety about the rapidly increasing number of captive domiciles. Our apprehension at the time centered on the lack of adequate supervision provided by the growing ranks of domiciliary states. Our major fear then, as it is today, is that there are just not enough qualified regulators to fill the needs of the growing number of domiciles. Captive regulations Unfortunately, today, there is another issue that may be of even greater concern. It involves those states that have enacted inadequate regulation, believing perhaps that this can provide some kind of competitive advantage. For the most part, many of the new captive domiciles have introduced legislation modeled after a state (i.e., Vermont) with prior, strong legislation. Then the new domicile works, modifies and tweaks the model legislation so that it meets the goals of the new state. The majority of captive domiciles have followed this approach. However, recently, one state appears to have developed what it describes as "state of the art" legislation that according to the state "is designed to encourage new captive companies to domicile in the state," as well as making it attractive for existing captive companies to re-domicile in the state. The state in question is North Carolina which had their captive law passed and signed into law by Governor Pat McCrory on June 19, 2013. The governor selected Deputy Commissioner of Insurance Jeffery Trendel to head up the state's captive regulation when it became effective on July 1, 2013. Much of the information for this article was taken directly from the North Carolina Insurance Department's Web site as well as the Web site of the North Carolina Captive Insurance Association (NCCIA). Even at this early date, it is clear that this new trade group has been working to actively support the new law. W. Y. Alex Webb serves as chairman of the NCCIA. Webb is an attorney, a CPA, and a board certified specialist in estate planning and probate law with the firm of Webb & Graves, PLLC. According to Webb's bio, his major practice areas are advanced estate planning and asset protection techniques. A summary of North Carolina's new captive law is explained by Mr. Trendel, and can be found on the NCCIA Web site. This list includes such innovative features as: • Reasonable capital requirements. • Allows for the formation of pure captives, industrial insured captives, risk retention groups, protected cell captives (including incorporated cells), branch captives, and special purpose financial captives (SPFC). • No application fees (except for SPFC) • No annual fees. • No mandatory department examinations. • No regulatory approval of rates and forms. • Possible exemption from audit requirements for captives writing less than $1.2 million in premium. • No investment restrictions except for association captive insurance companies and risk retention groups. • No Commissioner "pre-approval" required for auditors, or actuaries or attorneys. Plus the NCCIA includes the following additional items as examples of the "Low Cost of Operation" under the new law: • No mandatory department examinations—special flexibility for 831(b)s. • $100,000 premium tax cap (PCC $200,000); $5,000 minimum premium tax (PCC $10,000). • Competitive premium tax rates. • Reasonable capital requirements—special flexibility for 831(b)s. One is struck with the general lack of meaningful and insightful regulatory controls of the state's captives. It would appear that North Carolina has taken the position that everyone who starts a captive has a proper business purpose and North Carolina does not feel that it is either its job nor its duty to provide sufficient regulatory constraints for captive owners or participants. Unfortunately, there are too many people in the captive community who will use this lack of regulation to take advantage of the legislation for financial gain with little concern for the feasibility of the resultant captive. For those owners, participants, managers, brokers and agents who don't always have the captive community's best interest at heart, North Carolina would appear to be well suited. However, its minimalist approach to regulation and oversight may cause long-term problems in the form of captive failures, and this could cause serious ripple effects throughout the captive community. The author Michael J. Moody, MBA, ARM, retired as the managing director of Strategic Risk Financing, Inc. (SuRF), a firm that had been established to advance the practice of enterprise risk management. As a regular columnist, he continues to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.
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