Bulletin 2008-03 Captive Management Requirements

Capitol Center

1201 Main Street, Suite 1000

Columbia, South Carolina 29201

Mailing Address:

P.O. Box 100105, Columbia, S.C. 29202-3105

Telephone: (803) 737-6160

BULLETIN 2008-03

MARK SANFORD

Governor

SCOTT H. RICHARDSON

Director of Insurance

TO:

All Captive Managers and Captive Insurers Authorized to Transact

Captive Insurance Business in South Carolina

FROM:

S~ott H. Richardso~ - -~

Director

~

(C/

SUBJECT:

South Carolina Captive Management Requirements

DATE:

March 28,2008

I.

PURPOSE

This bulletin sets forth the general requirements to serve as a captive manager in South

Carolina. Captive managers are responsible for providing a variety of administrative and

management services to captives licensed in South Carolina. Effective captive

management is important to the continued viability, growth and strength of the South

Carolina captive insurance market. South Carolina law requires the Department to

consider the character, reputation, financial responsibility, insurance experience and

business qualifications of captive managers. See S.C. Code Ann. §38-90-60 (2002). The

qualifications and experience of the managers and officers must be considered before a

certificate of general good is issued for a captive insurance company to transact business

in this state.

A captive manager may be an individual or a firm. To manage the affairs of a captive

insurer licensed in this state, the individual or firm must be approved by the South

Carolina Department of Insurance. S.C. Code Reg. 69-60 provides that "no person shall,

in or from this state, act as an insurance manager, broker, agent, salesman, or reinsurance

intermediary for captive business without the authorization of the director or his

designee." See S.C. Code Reg. 69-60 (2000). In order to receive and maintain such

approval and authorization, all captive managers must comply with the minimum

requirements set forth below

provides that "no person shall,

in or from this state, act as an insurance manager, broker, agent, salesman, or reinsurance

intermediary for captive business without the authorization of the director or his

designee." See S.C. Code Reg. 69-60 (2000). In order to receive and maintain such

approval and authorization, all captive managers must comply with the minimum

requirements set forth below. The Department will periodically review the management

firms operating in this state to ensure they and the captives they manage are operating in

accordance with South Carolina law. Those managers found not to be in compliance will

be immediately suspended from submitting new captive applications and given a specific

period of time within which to correct any deficiencies. Failure to correct deficiencies by

the established deadline may result in the imposition of regulatory sanctions against the

South Carolina Captive Management Requirements

captive insurer and the withdrawal or suspension of approval for the captive manager to

operate in this state.

II.

CAPTIVE MANAGER QUALIFICATIONS

Individuals or business organizations may apply to be approved for the management of

captive insurance companies licensed in South Carolina.

Applications for approval shall be made using a fom1 prescribed by the director. When

considering the approval or disapproval of an application to serve as a captive manager,

the South Carolina Depmiment of Insurance considers the following: character,

reputation, financial responsibility, insurance experience and business qualifications of

the applicant.

a.

Character

sed in South Carolina.

Applications for approval shall be made using a fom1 prescribed by the director. When

considering the approval or disapproval of an application to serve as a captive manager,

the South Carolina Depmiment of Insurance considers the following: character,

reputation, financial responsibility, insurance experience and business qualifications of

the applicant.

a.

Character. The applicant has not been the subject of, nor has the applicant been

an officer or director or key management person in any insurance or reinsurance

company or business venture which has been issued a restrictive or disciplinary order

(suspension, supervision, revocation order, etc.) by any regulatory authority as a result of

their direct action or inaction, nor has the applicant been convicted of any criminal

activity involving insurance fraud, breach of trust or dishonesty.

b.

Reputation. The individual or firm is known for its experience and expertise in

insurance company or captive insurance financial management as evidenced by the CPA

or other professional designations. The applicant must be able to establish that it has

sufficient expertise and experience to exercise proper oversight over the financial and

administrative affairs ofthe captive insurer.

c.

Financial responsibility. The ability of the individual or firm to be financially

accountable for its performance as evidenced by one or more of the following: self-

insurance; the posting of a bond; errors and omissions coverage or directors and officers

liability coverage; or both, in an amount specified by the Department.

d.

Experience. The applicant has adequate experience in insurance and reinsurance

operations to allow the individual or firm to oversee the activities and management of the

captive insurance company

one or more of the following: self-

insurance; the posting of a bond; errors and omissions coverage or directors and officers

liability coverage; or both, in an amount specified by the Department.

d.

Experience. The applicant has adequate experience in insurance and reinsurance

operations to allow the individual or firm to oversee the activities and management of the

captive insurance company. The applicant must also have sufficient knowledge of the

line of business written by the captive insurer to demonstrate to the satisfaction of the

director their ability to oversee the company's activities associated with the line of

business being written.

Applicants approved as managers of captive insurance companies will receive a letter

confirming approval from the Department of Insurance. Such approval shall be for an

indefinite period and may be rescinded or withdrawn by the Department. A list of

approved captive managers may be found on the Depmiment's website at

http://www.doi.sc.gov.

South Carolina Department of Insurance

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South Carolina Captive Management Requirements

III. Captive Manager Responsibilities

All captive managers in this state are charged with the following general responsibilities:

a. Maintaining a Home Office for the Captive Insurer

The captive manager will maintain a place of business that will be the home office of the

captive in South Carolina. The captive manager shall inform the Department oflnsurance

of any changes in the contact names, addresses, and phone numbers for captive clients as

well as changes in the management, officers, or directors of the captive within ten

business days following the change.

b. Operating Under Written Service Agreements

The captive manager will enter into a written services agreement with captives under

management describing services to be provided by the manager and methods of

compensation

s, addresses, and phone numbers for captive clients as

well as changes in the management, officers, or directors of the captive within ten

business days following the change.

b. Operating Under Written Service Agreements

The captive manager will enter into a written services agreement with captives under

management describing services to be provided by the manager and methods of

compensation. If the captive manager performs the duties of an insurance managing

general agent, reinsurance intermediary, third party administrator, broker or agent, the

manager must also be specifically authorized by the Department of Insurance to perform

any or all of these functions.

c.

Providing, at a Minimum, the Following Basic Services to All Captive Clients:

1) Record Retention

The captive manager will maintain and make available for inspection by the

Department oflnsurance, at the captive's home office in South Carolina, copies of

all policies or reinsurance agreements entered into by the captive, copies of

organizational documents, shareholder and participant agreements, management

agreements, approved business plan summaries and financial projections, copies

of underwriting and claims records required to support payment of fees and taxes

required by statute, and the financial information reported to the shareholder and

to the Department.

In the event certain documents such as insurance policies, claim files, or

underwriting files are handled by an MGA, MGU, TP A, or other third party, the

manager shall maintain copies of in-force policy forms, endorsements, and other

materials along with lists of policies, claims, and underwriting statistics sufficient

to properly account for the insurance activity of the company and make available,

to the Department any of the policies or files selected for examination by the

Department within ten business days of the request or other timeframe approved

by the director or his designee

olicy forms, endorsements, and other

materials along with lists of policies, claims, and underwriting statistics sufficient

to properly account for the insurance activity of the company and make available,

to the Department any of the policies or files selected for examination by the

Department within ten business days of the request or other timeframe approved

by the director or his designee.

When board meeting minutes or other corporate documents are held by the

company's legal counsel, the manager shall make these documents available to

South Carolina Department oflnsurance

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South Carolina Captive Management Requirements

the Department within ten business days of the request or other timeframe as

approved by the director or his designee.

2) Reporting

Captive managers shall comply with South Carolina law and the repmiing

requirements detailed in this bulletin and other directives from the South Carolina

Department of Insurance.

3) Subcontracting

The manager will keep copies of all service agreements entered into by or on

behalf of the captive insurance company, including services subcontracted by the

captive manager to affiliated and non-affiliated entities.

4) Meetings of Shareholders, Members, and Directors.

The manager shall attend all board meetings and other meetings of shareholders,

members, or directors, as appropriate. The manager, or legal counsel, shall distribute

meeting agendas and discussion materials as appropriate, collect required documents,

notify participants of meeting dates and times, hold meetings as required by law, prepare

documents for use in the meetings, and prepare and maintain meeting minutes,

resolutions, and other documents.

IV.

REPORTING REQUIREMENTS

Listed below are general reporting requirements for persons managing captive insurers in

South Carolina.

a. Changes in Business Plans

e, collect required documents,

notify participants of meeting dates and times, hold meetings as required by law, prepare

documents for use in the meetings, and prepare and maintain meeting minutes,

resolutions, and other documents.

IV.

REPORTING REQUIREMENTS

Listed below are general reporting requirements for persons managing captive insurers in

South Carolina.

a. Changes in Business Plans.

Managers shall obtain prior written approval from the Department before implementing

any proposed changes to a captive's plan of operations that will have a material impact

on the captive's operations. A material change is a change to any information in the

questions section of the captive insurance company license application that affects the

nature of the insurance business conducted. Failure to comply with this requirement may

constitute grounds for regulatory action including suspension or withdrawal of approval

to serve as a captive manager in this state and regulatory action against the company that

may include fines or suspension or revocation of its Certificate of Authority.

b. Financial Statements and Proformas.

Managers shall file updated financial projections (expected basis) when there are material

changes to the plan of operations that produce a material change to the company's

financial statements, or as otherwise requested by the Department.

South Carolina Department of Insurance

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South Carolina Captive Management Requirements

c. Notification of Adverse Financial Condition.

Within ten days following the completion of quarterly or annual reports, or when the

manager otherwise becomes aware of material changes which would render the captive

company to be out of compliance, the manager shall notify the Department that a captive

is out of compliance with statutory capital requirements, or any other adverse financial

condition. Procedures to be taken to ensure future compliance must be provided within 30

days.

d. Violations of South Carolina Law

the

manager otherwise becomes aware of material changes which would render the captive

company to be out of compliance, the manager shall notify the Department that a captive

is out of compliance with statutory capital requirements, or any other adverse financial

condition. Procedures to be taken to ensure future compliance must be provided within 30

days.

d. Violations of South Carolina Law.

The captive manager must notify the Department within ten days' notice of the following

conditions: 1) a captive is not operating in compliance with South Carolina law or

applicable federal law, its business plan or the terms and conditions of licensure as set

fmih in writing by the South Carolina Department of Insurance; 2) there is a deficit in the

funds held in trust for the benefit of the captive insurer; or 3) there has been a material

change in the operations of the captive which has not been approved by the Department.

In each instance, the captive manager must provide to the Department within the

timeframe established by the Department the steps that will be taken to remedy the

violation and to ensure future compliance.

e. Statutory Reports.

All statutory reports required by the Department must be filed by the captive manager. A

captive manager shall file on behalf of the captive it manages, and submit to the

Department, on or before March 1st of each year, a report of the financial condition of the

captive insurer. These financial statements shall be prepared in accordance with generally

accepted accounting principles, subject to any modifications approved or accepted by the

director, unless otherwise directed or approved by the director or his designee. All other

required filings shall be made in accordance with applicable state statutes and

regulations.

f.

Annual Audits

ition of the

captive insurer. These financial statements shall be prepared in accordance with generally

accepted accounting principles, subject to any modifications approved or accepted by the

director, unless otherwise directed or approved by the director or his designee. All other

required filings shall be made in accordance with applicable state statutes and

regulations.

f.

Annual Audits.

All captive insurance companies shall undergo an annual audit by an independent

certified public accountant, and the captive manager shall file on behalf of the company it

manages such audited financial report with the director on or before June 30th for the

year ending December 31st immediately preceding. The manager shall file all retums for

taxes due to the South Carolina Department of Insurance and remit payment of taxes and

fees for captives under management.

Regulation 69-60 and §38-90-70 specify the reports that must be filed with the

Department. In addition to the reports referenced in those sections and outlined above,

the captive manager is required to submit with its mmual financial statement an actuarial

opinion to determine the adequacy ofthe loss and loss adjustment expense reserves for all

captives under management, unless a written waiver has been applied for and granted

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prior to the due date by the director or his designee. Failure to file the specified reports

by the established deadline shall result in the imposition of administrative disciplinary

action, up to and including revocation of the certificate of authority to transact business in

this state.

V.

TERMINATION OF CAPTIVE MANAGEMENT AGREEMENT

Following termination of a management agreement between an approved captive

manager and a captive, the terminated manager shall inform the Department of the

reasons for termination and the effective date of the change

strative disciplinary

action, up to and including revocation of the certificate of authority to transact business in

this state.

V.

TERMINATION OF CAPTIVE MANAGEMENT AGREEMENT

Following termination of a management agreement between an approved captive

manager and a captive, the terminated manager shall inform the Department of the

reasons for termination and the effective date of the change. The newly appointed

manager shall notify the Department, in writing, confirmation of the effective date of

change; the date that all books and records of the company will be in their possession;

and at what South Carolina address. Within 30 calendar days following the change of

manager, an executed management agreement shall be provided to the Department along

with a board resolution approving the new appointment.

VI.

PROCEDURES FOR CREDIT FOR CAPTIVE REINSURANCE

Captive companies are permitted to take credit for reinsurance in accordance with §38-

90-11 0. The manager shall verify appropriate licensing of reinsurance intermediaries and

detennine whether a reinsurer is authorized. For unauthorized reinsurers, the manager

shall maintain evidence of compliance with §38-90-110 and provide to the Department

annual audited financial statements. The manager, reinsurance intermediary, or other

qualified party shall review all reinsurance agreements.

VII.

RESCISSION OF CAPTIVE MANAGER APPROVAL

The Department may withdraw or suspend approval of a captive manager if:

a. The captive manager knew or should have known the officers or directors of the

company were engaged in any conduct that, in connection with the captive entity,

violated state or federal laws or engaged in any conduct that would otherwise threaten

the solvency of the captive insurer and failed to report such conduct to the

Department in a timely matmer.

b

approval of a captive manager if:

a. The captive manager knew or should have known the officers or directors of the

company were engaged in any conduct that, in connection with the captive entity,

violated state or federal laws or engaged in any conduct that would otherwise threaten

the solvency of the captive insurer and failed to report such conduct to the

Department in a timely matmer.

b. The manager knew or should have known and failed to inform in a timely manner, the

captive board of directors and the director of insurance of actions of a captive under

management leading to revocation or suspension of the certificate of authority under

§38-90-90 and other pertinent sections.

c. The manager failed to perform the basic manager responsibilities or reporting

requirements described in this Bulletin.

d. The captive manager engaged in conduct detrimental to the interests of the captive

insurer, including but not limited to, conduct that constitutes a breach of the fiduciary

duty owed to the captive insurer or a conflict of interest.

South Carolina Department of Insurance

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South Carolina Captive Management Requirements

The manager will be notified by the director or his designee of conduct by the manager

that may warrant regulatory action by the Department. In most cases, the manager will be

given the opportunity to correct the conduct without further action by the director. Should

action be necessary, it may be informal, formal, or a notice of rescission of approval to

act as a captive manager in this state.

The manager will be given an opportunity to respond to the notice of the rescission of

approval as a captive manager

on by the Department. In most cases, the manager will be

given the opportunity to correct the conduct without further action by the director. Should

action be necessary, it may be informal, formal, or a notice of rescission of approval to

act as a captive manager in this state.

The manager will be given an opportunity to respond to the notice of the rescission of

approval as a captive manager. If the manager fails to provide evidence within 30 days of

receipt of notification that deficiencies identified by the Department of Insurance are

corrected, the captive manager will be removed from the list of approved captive

managers in the State of South Carolina and all rights and privileges of a qualified

captive manager for the state of South Carolina will be suspended or revoked. The

captive manager may appeal the decision to withdraw approval to the Administrative

Law Court in accordance with the provisions of S.C. Code Ann.§ 38-3-210 (2002).

The infonnation set forth in this Bulletin is based on current South Carolina law. Please

do not hesitate to contact Jeff Kehler, Program Manager, Office of Alternative Risk

Transfer Services if you have any questions1 or concerns about compliance.

1 Bulletins are the method by which the Director of Insurance formally conmmnicates with persons and

entities regulated by the Department.

Bulletins are departmental interpretations of South Carolina

insurance laws and regulations and provide guidance on the Department's enforcement approach. Bulletins

do not provide legal advice. Readers should consult applicable statutes and regulations or contact an

attorney of your choice for legal advice or if additional information is needed.

South Carolina Department oflnsurance

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