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North Carolina Boosts Its Captive Insurance Stature

One truth worth observing about North Carolina’s attitude toward advancing its status as a competitive domicile for captive insurance: nothing remains static for very long.

In June of the current year, for the second time in as many years, the state has made significant and beneficial amendments to the North Carolina Captive Insurance Act. It is expected that these changes will make the state even more attractive to captive owners.

Perhaps most important among the changes is the provision for allowing the Commissioner of Insurance discretionary judgment where Special Purpose Captives are concerned. These captives – especially group captives and agency captives – typically do not meet the requirements of other types.

Under the new amendment, the Commissioner has the latitude to make a qualitative judgment in determining whether to lower the initial capital requirement from the stated minimum of $250,000 to some lesser amount where prudent. In addition, the Commissioner may elect to exempt a captive from any “inappropriate provision of the act.” Taken as a whole, these new features provide potential captive owners a significant degree of flexibility in creating their risk management strategy.

A second change allows captives to apply for an exemption from making an annual statutory filing with the Department of Insurance as long as they submit timely audited statements. It is expected that this exemption will come as good news to captive managers, for whom the first quarter filing period is invariably a busy period, and will be especially beneficial for those engaged in getting captives up and running.

Yet another provision will ease the minds of owners who may have had occasion to allow their captives to become dormant for a period of time. Under the new amendments, such dormant captives will now be exempt from premium taxes and filing requirements. This new flexibility will be a significant help to owners under short-term budgetary constraints or who may be in the process of restructuring their insurance program.

Several amendments deal with the specifics of Protected Cell Companies (PCCs), as well as providing a new alternative. For example, under the new law, captives may establish separate accounts to segregate different insureds or disparate lines of business without establishing a PCC, which often entails a considerable amount of work. The new amendment provides for ring-fencing such separate account assets. This structure is a significantly easier option, although it is important to note that it is not as robust as that of a Protected Cell.

In another step aimed at providing more flexibility for captive owners, Protected Cells may now migrate from one PCC to another or even to convert to a stand-alone entity. In most other jurisdictions, this type of reorganization, while possible, travels a more circuitous path involving its own obscurities and hidden risks since it requires navigating both corporate law and the Internal Revenue Code. This process is simplified and clarified under the new amendments.

Finally, the new amendments provide for the enforcement of contracts between Protected Cells within the same PCC, previously impossible since such cells are not strictly legal entities in their own right. Each Protected Cell is now treated as though it were a separate legal entity.

Importantly, all of these changes were passed unanimously by the legislature, reflecting an admirable degree of cooperation and collaboration between the Department of Insurance and the North Carolina Captive Insurance Association (NCCIA). Further improvements are already under discussion for 2016.

The new flexibility embodied in the Captive Insurance Act, in combination with the pragmatic approach taken by state authorities, will provide a payoff in reduced costs, more flexible options for captive managers and owners and a higher profile for North Carolina as a progressive and attractive captive domicile.

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