South Carolina’s top insurance regulator says the state’s insurance department has addressed or is working to correct concerns about the state’s captive insurance regulation raised in a report from South Carolina’s Legislative Audit Council.

The recent audit found that “generally, the department’s licensing and examinations of captives complies with state law and regulations.” But it cited three issues with regard to captive insurance: The department didn’t collect all required information from captive companies; the department lacked standard procedures for examining captives other than risk retention groups or special-purpose financial captives; and 43 of 53 scheduled captive examinations were not completed within the three-year period required by state law.

The audit came at the request of legislators, driven initially by concerns about rising workers compensation costs.

Since licensing its first two captives in 2000, South Carolina has experienced rapid growth as a captive domicile, with 163 active captives at the end of 2008, according to a Business Insurance survey.

Scott H. Richardson, director of the South Carolina Department of Insurance, said information that was missing from captive files has been added. In addition, he said the department is auditing all captive licensing files to ensure that required information is collected and filed properly.

Regarding the lack of standard practices, the director said the department previously used National Assn. of Insurance Commissioners procedures for reviewing pure captives but now has implemented its own practices.

As for the examinations not conducted within the required three-year period, Mr. Richardson said, “That was true,” due to inadequate staff resources and making RRG examinations a priority over pure captive exams.

“We have a fair amount of RRGs, which is a pretty serious audit,” Mr. Richardson said. “We didn’t have the staff to do all the audits” because of budget cuts and staff departures, he said. “We said we’re more worried about the public from an RRG standpoint than from a single-parent captive standpoint.”

The audit report noted that of the 197 captive licenses South Carolina issued through September 2008, 60 were RRGs.

Mr. Richardson said the department will complete all outstanding examinations by mid-2010, contracting out most of the work.

Brady Young, managing director and president of Strategic Risk Solutions in Concord, Mass., agreed with South Carolina’s approach. “If you have to do triage and you don’t have adequate resources to do everything, spending the limited resources on RRGs…that’s a prudent decision,” he said. “Practically speaking, most captives are audited every year.”

David F. Provost, deputy commissioner in the Captive Insurance Division of the Vermont Department of Banking, Insurance, Securities & Health Care Administration, took a similar view, though he noted, “We are not in the same position. We do have the resources.”

Vermont’s captive law allows the state to expand the examination period from three to five years if the captive has been audited, and the division has used that flexibility to smooth its examination load, Mr. Provost said.

Mr. Richardson agreed that South Carolina’s rapid growth as a captive domicile, making it the third-largest U.S. captive domicile in 2008, could have been a factor in getting behind on exams. “There’s no question that that was probably an issue,” he said.

The department has a captive staff of 15, and probably will add one or two more soon, the insurance director said.

Citing the loss of staff in the department, Garry W. Coulter, executive vp at USA Risk Group in Greenville, S.C., said, “I’m not surprised with the report.” He added, however, that the South Carolina captive industry is strong and said, “The industry has offered to help any way it can to make the department more successful in the captive business.”