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Lowcountry captive insurance cluster blooms
By Dennis Quick
Senior Staff Writer
For high-risk companies and professionals seeking to insure themselves, the Lowcountry is gaining stronger appeal as the place to set up a captive insurance company.
Since 2000, when former Gov. Jim Hodges signed legislation allowing the development of the state’s captive insurance industry, the number of captive insurers in South Carolina has grown from two to 122, according to the South Carolina Captive Insurance Association in Simpsonville. In the United States, only Vermont, with more than 700, and Hawaii, with about 150, have more captives.
About $380 million in premiums were paid to South Carolina captive insurers in 2003. During that year, the industry generated a $5.5 million economic impact in tax revenues, jobs created for lawyers, accountants, actuaries and other financial service providers, plus hospitality and tourism-related expenditures wherever conferences were held.
What captive means
A “captive” is an insurance company owned by the insured. Car manufacturers, construction companies, trucking companies, medical doctors and other businesses and professions facing skyrocketing insurance premiums create captives to lower their insurance costs. The costs are less because companies control their own insurance instead of being tossed in a general pool with similar companies, some of whose claims are much higher than those of other businesses.
With a captive, a company’s insurance premiums reflect the loss record of that particular company and only that company, explains John J. O’Brien, CEO of Charleston Captive Management Co. on King Street.
Unlike other self-insurers who must wait until claims are paid before they can write them off as tax deductions, captives can write off claims as soon as they are filed. And because captives receive their claim payments sooner, they can more easily and accurately project losses and revenues, which gives captives easier access to reinsurance—insurance for insurance companies to help them cover overwhelming losses.
South Carolina’s allure
Former state insurance commissioner Ernst Csiszar modeled South Carolina’s captive legislation after Vermont’s, but Csiszar included fewer regulations and more tax breaks, an economic-development twist making South Carolina attractive to the captive industry, experts say.
Charleston’s beauty is also instrumental to the area’s growing captive industry, O’Brien says. By law, companies must hold annual meetings where they establish their captives.
“So they set up captives in places they like to visit,” O’Brien explains, adding that Bermuda and the Cayman Islands are the world’s leading captive locations for that very reason.
Vermont’s popularity as a captive center stems from that state being the first to establish a captive insurance industry nearly 25 years ago, says Jim Kinder,
president of the South Carolina Captive Insurance Association.
Determining feasibility
Companies like Charleston Captive Management perform feasibility studies for businesses to determine if they should set up a captive.
The studies compare a company’s premiums with its losses. Generally, if a company’s annual insurance premiums are $1 million or more, the company should consider a captive, O’Brien says.
O’Brien sees no slowing down of South Carolina’s captive industry. He says
captives are primed to move into other areas of insurance, such as hard-to-get coastal property coverage, for which his company is forming a captive.
“It could be approved this year,” he says.
Dennis Quick is senior staff writer for the Business Journal. E-mail him at dquick@crbj.com.
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