North Carolina wants to become a home to cat bond and ILS issuers

by Artemis on April 29, 2013

North Carolina is seeking to enact legislation which would make it a home to captive insurance and reinsurance companies and special purpose vehicles such as catastrophe bond issuers. In an effort to grow its share of the re/insurance market bill SB 476, sponsored by two Republican Senators, has moved through the North Carolina Senate Insurance Committee and is now in the Senate Finance Committee, the next step of its journey through State legislative.

SB 476 has been sponsored by Republican Senators Wesley Meredith and Tom Apodaca, who co-chair the Senate Insurance Committee and both sit on the Senate Finance Committee. The bill has support from the North Carolina Department of Insurance Commissioner, Wayne Goodwin, which should help to ease its passage. The bill has also received wider support as it’s seen as a way to create jobs and increase tax revenue within the State. Goodwin said that his goal was to turn North Carolina into the next State with an active captive insurance and reinsurance sector.

The bill would allow the formation of a number of types of captives, including what it terms Special Purpose Financial Captives. These SPFC’s are designed to facilitate securitization of insurance risk for the purpose of providing reinsurance coverage and aim to allow those being reinsured to access alternative and capital markets sources of capacity. It sounds very much like a catastrophe bond issuing vehicle.

The bill states:

Special purpose financial captives (SPFCs) are provided by this Subpart exclusively to facilitate the securitization of one or more risks as a means of accessing alternative sources of capital and achieving the benefits of securitization. SPFCs are created for the limited purpose of entering into SPFC contracts and insurance securitization transactions and into related agreements to facilitate the accomplishment and execution of those transactions. The creation of SPFCs is intended to achieve greater efficiencies in structuring and executing insurance securitizations, to diversify and broaden sources of capital for insurers, to facilitate access for many insurers to insurance securitization and capital markets financing technology, and to further the economic development and expand the interest of this State through its captive insurance program.

The bill would also allow for securitization transactions involving risks held in protected, or segregated, cell captives, something that could become popular if Captives decide to utilise collateralized reinsurance markets.

Captives are allowed under law in around 30 U.S. States already, so it seems North Carolina is just trying to position itself as able to accommodate these types of insurance and reinsurance vehicles as well so as not to miss out on any business. It is already possible to issue an insurance securitization, such as a catastrophe bond, from within certain U.S. States, but the offshore domiciles have the lead in terms of experience, facilities, service providers and cost to date. One example of a U.S. issued cat bond was 1999’s Domestic Inc. deal.

However, with the recent discussion of offshore reinsurance tax, a discussion which has even reached the level of U.S. President, it’s possible that other states may try to position themselves as an alternative home for reinsurance vehicles and securitizations in case the use of offshore domiciles becomes more difficult under U.S. law in the future.

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