Vermont Agency of Commerce & Community Development
Any uncertainty in the US arises from external forces, says Vermont’s Dan Towle
How would you describe the regulatory environment in the US for captives? Where is there uncertainty?
The environment can be described as stable from the point of view of the various states with captive-enabling legislation. Any uncertainty arises from external forces, primarily the National Association of Insurance Commissioners (NAIC).
The NAIC is not the bogeyman, but most regulators are focused on the regulation of traditional insurance, and often do not consider the potential adverse consequences of model laws and regulations vis-à-vis captives.
For example, changes to the Credit for Reinsurance Model Law and Regulation can have a direct impact on the many captives that act as reinsurers for the parent’s business and it is imperative that those in the captive business monitor the activities of the NAIC, International Association of Insurance Supervisors (IAIS) and others to prevent the unintended consequences that may arise from their actions.
What is the IRS’s current position on micro captives? Is it easing off?
When it comes to micro captives, the Internal Revenue Service (IRS) is primarily concerned with the abuse of the 831(b) provision by using it to transfer wealth to next generations tax-advantaged (or untaxed).
If we can resolve that issue, I think the 831(b) election can survive. Vermont still holds to the same position we’ve always held: we license captives based upon their insurance programme and financial solvency, and expect companies to follow the tax code.
What is the situation with REITs and the proposed rule from the FHFA?
The Federal Housing Finance Agency (FHFA) published a proposed rule that would ban captives from membership in the Federal Home Loan Banks (FHLB) system.
Vermont’s was one of the hundreds of letters written to the FHFA in opposition to the proposal. We believe that banning captives simply because they’re captives has no basis in sound regulation. As long as the captive can support the mission of the FHLB, there is no reason to restrict their membership.
As noted already, our chief concern is in licensing a captive with a sound insurance purpose—any other benefit, such as membership in the FHLB or favourable tax treatment, is secondary.
There are more than a dozen Vermont captive members of the FHLB, and we expect that number to grow slowly. At this point, the FHFA has not withdrawn its proposed rule, but it doesn’t appear to be enforcing it, either.
What has Vermont been doing to address the NRRA?
A bill has been introduced in congress and is sponsored by senators Patrick Leahy of Vermont and Lindsey Graham of South Carolina. The bill would clarify any confusion by making clear that the Nonadmitted and Reinsurance Reform Act (NRRA) does not apply to captive insurers. Vermont, along with the Vermont Captive Insurance Association (VCIA), has been active in our efforts in Washington DC to help move the bill forward.
Unfortunately, there is not much activity on moving much of any kind of legislation. We are actively trying to get more sponsors for the bill and would encourage other domiciles to get their congressional delegations to sign on as a sponsor.
Are there any new regulatory updates on the horizon in Vermont?
We’re just starting the process of developing legislation for the 2016 session. It is a Vermont tradition that every year we evaluate our existing legislation and review all recommended legislative proposals. I don’t foresee anything earth-shattering this year, but there’s always something interesting.
We will have some minor changes to keep up with our NAIC accreditation, and the VCIA will bring us some changes as well. We are fortunate in Vermont that we have a very supportive legislature and governor and making modifications to our law is always seen in a positive light.
How is the year shaping up with new formations?
This year has been very active, and more applications are coming. We have licensed 25 companies to date, and have approved a number of new cells as well. The variety of programmes and diversity of parent companies shows that the primary trend is creativity.
We are seeing new cell companies being formed, redomestication activity, traditional property and casualty captives being formed by manufacturers and medical malpractice captives being formed by healthcare organisations. Construction remains an active source of formations, as does real estate, healthcare stop-loss, and reinsurance of life insurers.
