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Summer 2003 Update: Your Guide to Vermont Captives From my vantage point, activity within the alternative
market since the second half of 2001 is unprecedented. There have been
other heady times for the alternative market; in 1987, over fifty captives
were licensed in the State of Vermont. Still, it appears 2002 will prove
to be a watershed year within the industry. Activity in 2002 in the State
of Vermont appears to be on track to challenge, and possibly surpass,
that 1987 record. With all the current activity, one might think of the most recent soft market (loosely defined as the thirteen year period from 1988 through 2000) as a slow time for the alternative insurance marketplace. In actuality, the market continued to record steady growth during the period, as evidenced by the average of twenty-eight licenses issued by the Department from 1988 through 2000. In October of 2000, the International Risk Management Institute, Inc. reported that one-third to one-half of the commercial property casualty premiums were generated by the alternative market. Market professionals I speak with today put that estimate at over fifty percent. As a result of the recent activity, and with no slowdown in sight, we thought it might be helpful to briefly outline some of the benefits of insuring with captives and present a guide to implementing an alternative market facility. Let’s assume that you, as a risk manager, have been considering the advantages of forming a captive insurer. While a captive seemed like a solid idea during the soft market, it has developed into a long-term approach to smoothing out the highs and lows of the volatile insurance market. With your renewal looming, and your broker warning of reduced coverage availability coupled with significant price increases, a captive has become an essential risk management tool. With the help of a consulting actuary you have completed a captive feasibility study. The feasibility study includes an analysis of the Company’s loss history and basic review of the proposed program structure (limits, retention, reinsurance, etc.), five-year pro-forma projected financial results, along with other information useful to management. After review of the feasibility study and discussion with management, it has been determined that establishing a captive will enable your company to realize the following benefits:
Let’s further assume that you’ve analyzed a variety of domiciles and determined that Vermont is the clear choice based on Vermont’s legislative commitment to the alternative market industry, the accessibility and professionalism of its regulators and access to service providers knowledgeable about the operational aspects of your captive. You want your captive in place within eight months to avoid that painful renewal in the commercial market. So, you ask, what do I need to do to get my captive approved, licensed, and ready to write business?
After the decision is made to form a captive, management’s first order of business is to select service providers. Service providers are an invaluable resource to any risk manager when setting up a captive. Incorporation, regulatory compliance and getting your captive in place are much less daunting tasks if you rely on the substantial knowledge of Vermont insurance managers, attorneys, accountants, and bankers. It’s important to note that Vermont statutes require each captive to maintain its principal place of business within the state. As a result of this statute and because few companies have staff adequately experienced to run the day-to-day operations of an insurance company, the vast majority of captive sponsors team-up with unrelated management companies. The management company is often selected based on previously established brokerage relationships or other contacts. The next order of business is name selection. Vermont statute says that you must not pick a name that is the same as, deceptively similar to, or likely to be mistaken for any other existing business name registered in the State of Vermont. With over 560 captives licensed to date, it would be best to have one or two back-up names in mind.
Generally, the process of incorporating a captive insurer in Vermont and applying for a license from the Department will involve the following steps:
The Department estimates that it takes thirty days from the date the application is received until approval. Once the Commissioner has approved the application, the Department notifies the applicant that they can begin implementing their plan of operation. Generally, capitalization is the first order of business for the new captive. As described in Section 6004 of the Vermont Captive Statutes, minimum paid-in capital and surplus requirements are as follows:
For captives formed as a reciprocal and managed through an attorney-in-fact, the minimum capital and surplus is $1,000,000, regardless of the type (pure, association, industrial insured, or sponsored captive). The Commissioner may prescribe additional capital and surplus based upon the type, volume, and nature of insurance business transacted. Capital and surplus may be in the form of cash or an irrevocable letter of credit issued by a bank chartered by the State of Vermont or a member bank of the Federal Reserve System that is approved by the Commissioner. It’s important to note that no assets of the captive insurer may be used to collateralize a letter of credit used for capitalization purposes. The parent company’s or sponsoring entities’ assets may to used.
A summary of applicable State of Vermont fees to set up your captive and recurring fees is as follows:
Annual premium taxes are due in February. There is a $5,000 annual minimum premium tax. However, the Vermont legislature granted a “Tax Holiday” to newly licensed captives during 2001, 2002 and 2003. The Tax Holiday relieves them of first year local premium tax, up to $5,000.
Each captive insurer is required to file a report of its financial condition to the Commissioner. Vermont captive insurers report using Generally Accepted Accounting Principles (GAAP) as their basis of accounting, with any useful or necessary modifications or adaptations thereof approved or accepted by the Commissioner. If requested, the Commissioner may approve the use of statutory accounting principles in some circumstances. In general, pure captive insurers file the Vermont Captive Insurance Company Annual Report, a form developed by the Department and approved by the Commissioner. Association captives and Risk Retention Groups will file an annual statement on the National Association of Insurance Commissioners (NAIC) blank that is currently in use by the insurance industry (the “yellow book”). For captives reporting on a calendar year, the applicable financial report is due prior to March 1st. Insurers may apply, in writing to the Department, for permission to file on a fiscal year-end. If an alternative reporting date is granted, the required report is due sixty days after year-end. Additionally, Vermont Financial Regulation 81-2 requires each captive to submit financial statements audited by an independent certified public accountant within six months of year-end. The independent accountant must be approved by the Commissioner. Financial Regulation 81-2 also requires that loss and loss adjustment expense reserves be certified by a Fellow of the Casualty Actuarial Society, a member in good standing of the American Academy of Actuaries or an individual who has demonstrated his competence in loss reserve evaluation and has been approved by the Commissioner. If the captive is 100% reinsured and does not retain any insurance risk, the Department may, at its discretion, grant an annual waiver of the certification requirement. Once every three years the Department will conduct a thorough examination of financial and other records and will issue a Report on Examination signed by the Commissioner. Upon application, and at the discretion of the Commissioner, the examination period may be increased to a five-year period. The examination is intended to verify the financial condition of the captive, its ability to fulfill its obligations and to determine compliance with all applicable statutes. The charges and expenses of the examination are borne by the captive. A captive’s board of directors (or advisory
committee as is the case with a reciprocal insurer) is required to hold
at least one meeting each year within the State. The time of year and
meeting place should be “strategically” scheduled to take
advantage of Vermont’s offerings, including Fall foliage, a New
England summer weekend, or perhaps a Winter break with an extra day for
mountain recreation. Just tell everyone you were held captive in Vermont!
Additional information on the captive industry and forming a captive can be found on the following web-sites:
This article was reproduced with the kind permission of Captive Review |
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