As one of the smallest states in the US, it is difficult to believe that Vermont is currently the leading captive insurance domicile in the country. With laws passed in 1981, now more 30 years on the state is on the brink of an impressive milestone.
As one of the smallest states in the US, it is difficult to believe that Vermont is currently the leading captive insurance domicile in the country. With laws passed in 1981, now more 30 years on the state is on the brink of an impressive milestone.
Richard Smith, president of the Vermont Captive Insurance Association (VCIA), explains that 2013 is a particularly special year for Vermont as the state is “on the verge of licensing its 1000th captive … which is very exciting”.
Indeed, there is not correlation between the state’s physical size and its economy and captive industry, according to Dan Towle, director of financial services for Vermont’s Agency of Commerce and Community Development.
He says: “Vermont is one of the smallest states with a population of around 625,000 and the captive industry is a very important part of Vermont’s economy. The captive industry employs over 400 direct jobs, which leads to another 1000 indirect jobs. Captives pay over $25 million in taxes and fees to Vermont, and at least that much more to local service providers.”
Vermont’s success can be attributed to its appropriate regulations, captive division, and insurance department, says Mary Richards, executive vice president of JLT Towner,
Richards adds: “Consequently, Vermont’s regulations and operations became the standard for other states to adopt and follow. [JLT Towner] continues to promote Vermont as a domicile because we know that the captive division staff who license and examine captives are extremely competent and responsive, that Vermont’s governor and legislature have been unwavering in the support regardless of party affiliation, and that there is an infrastructure of skilled and experienced attorneys, auditors, actuaries, and managers in [the state].”
Nancy Gray, regional managing director for the Americas at Aon Risk Solutions, feels that costs and geographic preference also work in Vermont’s favour.
“Vermont is very competitive on costs as most of the newer emerging domiciles in the US have adopted captive laws very similar to Vermont law and do not offer an advantage on costs. From a geographic standpoint, Vermont is an attractive domicile for captive owners located on the East Coast and Mid-West.”
For Towle, consistency is the key to Vermont’s continued success. In his words: “The state licenses top quality captives, and regulates them in a manner that considers the unique risks [that] each company faces.”
“Not many would have imagined that Vermont would grow from one captive to be the third largest domicile in the world. Vermont is here for the long term with a reliable, consistent operating and regulatory environment. It is what has earned Vermont the reputation as ‘the gold standard’ of captive domiciles.”
While the state’s successes cannot be denied, there are some instances when going elsewhere, or in fact staying at home, may be a better option. Gray explains that if a captive owner is writing a significant amount of direct premiums for US risks, then it may consider forming a captive in its home state.
Gray adds that this “will minimise any potential self-procurement or non-admitted taxes under Non-Admitted and Reinsurance Reform Act (NRRA) as the captive will only be assessed for the captive premium tax as an admitted captive insurer in the home state”.
Richards says that for clients of JLT Towner, the only drawback is Vermont’s requirement to hold an annual meeting in the state, but that being said, it is an obstacle that Vermont’s regulators are trying to resolve.
As Richards explains: “It’s not easy to get [to Vermont] from everywhere else in the country. But Vermont has responded to that concern by allowing only a quorum of directors to physically come to the meeting, while others can participate via conference call. To my mind, the biggest drawback of having to hold a meeting in Vermont is that once you visit, you may not want to leave!”
Compete off the heat
As it currently stands, there are now more than 30 US states with captive legislation, with Texas, North Carolina and New Jersey most recently entering the industry, so competition is at an all time high. If Vermont wants to maintain its position as leader, it may have some work to do.
Dave Provost, deputy commissioner of captive insurance at the Vermont Department of Financial Regulation, welcomes the competition.
He says: “We welcome more jurisdictions and often help them get started. We are proud that Vermont is often the model used when other states decide to pass captive legislation. [But] our chief concern with the proliferation of domiciles is the potential dilution of talent and its impact on regulation.”
“Many other states have noticed Vermont’s success, but few remember that it took us 30 years of hard work to get where we are. Passing a captive law does not create a successful domicile overnight.”
Speaking on behalf of JLT Towner’s captive clients, Richards feels that the added competition hasn’t harmed Vermont’s reputation. In fact, she says that the state’s position is as strong as ever.
“We’ve seen some interest in other domiciles, mainly dependent upon where the parent is headquartered, but really have not seen a decrease in interest in Vermont. In fact, we’ve seen companies redomicile their captives to Vermont from some of those newer domiciles.”
“Several states seem to have passed captive legislation without also making the necessary investments in staff and systems to operate the programme. When we look at potential domiciles for new captives with prospective clients, and compare them with the infrastructure and experience of the captive team in Vermont, it’s a pretty easy decision to domicile here.”
Gray adds that there have been a few captives that have redomesticated to their owners’ home states, but those have been bids to minimise any potential tax exposure as a result of the passage of the NRRA.
Push back
Looking ahead, Towle feels that Vermont will continue to do well in the marketplace. “The captive insurance industry has a positive story to share. We all need to take on the responsibility of sharing that story so that captives and the insurance industry will be portrayed in a more positive light. Improving the image of captive insurance will also enhance the growth of the industry.”
Provost adds that 2013 will be full of challenges for Vermont and the captive industry as a whole, with image coming top of the list.
“The insurance industry is often portrayed as the bad guy, and captives are a complete unknown outside of the small group directly involved. Captive insurance provides societal benefits that few are aware of—for example, consider the market for medical malpractice insurance in such states as Pennsylvania and Connecticut.”
“In Pennsylvania in the early 2000s, there came a time when doctors and hospitals could not buy insurance. In Connecticut, doctors were leaving the state because they could not insure their practices. Captives provide an alternative, and since the doctors and hospitals now own their own insurance companies, the focus on loss prevention is heightened, to the ultimate benefit of patient care.”
Towle believes that the whole industry needs to take on the responsibility of sharing the story of captives to ultimately portray the industry in a more positive light.
Provost adds: “The captive insurance community is a creative group. As captives have grown, they naturally have begun pushing the envelope into areas that weren’t imagined even a few years ago. As captives push out, others, particularly other regulators, will push back. We will continue to work with other regulators to find an appropriate balance.”
