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Innovation Is the Key Theme of this Year's Vermont Captive Conference

VCIA Conference Logo-Rich Smith
July 15, 2019 recently interviewed Rich Smith, president of the Vermont Captive Insurance Association (VCIA), to discuss its annual captive conference, happening August 6–8 at the DoubleTree by Hilton, in Burlington, Vermont. True to this year's conference theme, "Where the Captive World Comes To Meet!" VCIA will host 1,100 people from all over the world to experience the conference's high-quality educational offerings and take advantage of its numerous networking opportunities. Nearly 100 companies exhibit at VCIA, featuring the newest industry product and service developments. Mr. Smith reminds readers to register online now so as not to miss out on this major captive event.

For decades, Vermont has been, by far, the largest captive insurance company domicile in the United States and the third largest in the world. However, unlike in 1981, when Vermont became just the third US state with a captive insurance statute, today well over 30 US states have their own captive laws. In view of that widespread competition, how and why do you believe Vermont will continue to retain its status as the largest US captive domicile?

The competition that new domiciles have brought to captive insurance has been good for the industry for the most part. It has kept all domiciles, including Vermont, on their toes as we know that captives are fairly portable. The reason why I believe Vermont will continue to maintain a leadership position in the industry is for the very reason we don't rest on our laurels of the past or present. We continue to work hard at every level to sustain the same environment that has attracted captives for many years: the industry's most knowledgeable and accessible regulators; innovated and flexible laws and regulations; strong, unwavering political support—whether Democrat, Republican, or Independent—since the 1980s; and the virtual center of excellence Burlington, Vermont, has become due to the experienced service providers working for the entire industry.

It is well known that Vermont is, with 580 captives at the end of 2018, the largest US domicile. What are other impressive facts and statistics about Vermont's captive industry?

With over $21.7 billion in gross written premiums, probably the most interesting statistic about Vermont's captives is that there are $192.2 billion total assets under management (includes intercompany loads, accounts receivable, reinsurance recoverable), as well as $73.8 billion in aggregate cash and investments. Forty-five of the Fortune 100 and fifteen of the Dow Jones 30 have captives in Vermont, but surprisingly more than half of our captives generate less than $10 million in gross written premiums. Vermont's 38-year history in captives has proven durable!

Vermont is not a domicile where state lawmakers leave the captive statute untouched. Indeed, almost every year, Vermont lawmakers have passed legislation amending the captive statute. What have been some of the more significant legislative changes that have been enacted in recent years?

Indeed, the Vermont General Assembly looks forward to meeting with the captive industry every year and seeing what changes can be made to its captive statutes to better stay in the vanguard of the industry. Sometimes they are only tweaks—small changes that streamline regulation or eliminate unnecessary provisions, and sometimes they are bigger. This year's bill proposed several updates to Vermont's leading captive law, including modifications to the captive examination schedule and improvements to the statute governing group captive investments.

Some of the more significant changes enacted in the past few years include the creation of dormant captives, a mechanism whereby a captive that has ceased insurance operations could cost-effectively retain its license in order to enable it to resume insurance operations in the future. A dormant captive would be required to maintain a lower level of minimum capital and would be exempt from premium taxes. In 2015, we reduced the capital requirements for cell company structures from $500,000 to $250,000. The bill also changed the structure on capital requirements for all captive companies by allowing captives to include marketable securities along with cash, trusts, and letters of credit. Another recent change is Vermont now allows the free movement of cells to a different sponsored captive or the conversion of cells into either an incorporated cell or a separate captive.

In 2017, legislation was passed adding agency captive, which is a reinsurance company controlled by an insurance agency or brokerage, to the types of captives that can be formed in Vermont. An agency captive creates a long-term relationship between the agency and the insured, where interests—risk appetite, selection, pricing, loss control, claims management, etc.—are aligned.

Last year, Vermont Governor Phil Scott signed a bill that offers an onshore affiliated reinsurance alternative to insurance companies affected by the recent imposition of the Base Erosion Anti-Abuse Tax on reinsurance ceded to offshore affiliates. An affiliated reinsurance company is an insurance or reinsurance company that reinsures risks only from its parent or affiliates and is subject to a financial solvency regulatory system separate from that generally applicable to traditional insurers and/or reinsurers in the ceding entity's domestic jurisdiction.

Are more legislature changes to the captive statute expected next year?

Yes, we begin the process in late summer when I survey VCIA members and meet with the captive legal and management teams here in Vermont to build a list of suggested changes to Vermont's captive law. I then meet with the state's captive leaders, Director of Financial Services Ian Davis and Deputy Commissioner for Captive Insurance Dave Provost, as well as Dave's team at the Department of Financial Regulation, for their ideas and input. After an iterative process over the course of a number of weeks, we emerge with a consensus captive bill to bring to the Vermont General Assembly as it starts its new term in January. The legislature usually kicks out the captive bill for the governor's signature that spring, so the process is fairly quick and efficient.

A good number of Vermont's captives have come from other domiciles. What have been some of the reasons that led those captives to redomicile to Vermont?

When captives are formed, the domicile's decision is often a matter of geography or the perceived cost of doing business in that state. Often, after a few years under a particular regime, captive owners realize that the regulators are not as committed to captive insurance, risk retention groups, or the particular captive itself and look for a more experienced and responsive environment. Advisers recommend reviewing all parts of a program, including the domicile, every few years. In that process, a notable net gainer has been the state of Vermont. Over the past 2 decades, the pace has waxed and waned, but the Green Mountain State has had 3 arrivals for every 2 departures.

If the redomestication is of an already-existing entity, then it has proven feasibility. In that case, the process can take just a few weeks. Vermont regulators have a fairly set process on their end, because they see several a year. Other jurisdictions may not be so familiar with redomestications.

The companies that come to Vermont want to be in a domicile that is well regulated. They are not simply looking for low taxes or a rubber stamp. We are dealing with sophisticated insureds who want to be in a jurisdiction that regulates in a manner commensurate to the risks being underwritten.

As one recent captive owner that redomesticated to our state said, "The Vermont vision for our industry is appreciated by the regulated community."

Most captive domiciles have their own regulatory staffs. What makes Vermont's captive regulatory staff special, and what has contributed to Vermont's success as a captive domicile?

As leaders of the captive industry, Department of Financial Regulation (DFR), the Vermont captive regulatory team, is consistently recognized by international trade publications and industry peers as the most experienced and knowledgeable captive insurance regulators in the world.

A consistent regulatory environment with over 35 years of experience is key. It starts with a focus on quality programs with continuity of staffing and involved and responsive regulators who work at the speed of business to provide a responsible, measured approach to licensing and review.

Captive insurance is the only business of the DFR captive staff of 35 that includes 11 CPAs and 21 Accredited or Certified Financial Examiners in their decades of experience.

Backed by a unique infrastructure made up of in-house examiners and support personnel, the team works closely together and in partnership with Vermont's governor and state legislature to make sure that Vermont's regulations keep pace with the fast-changing needs of the industry.

The VCIA conference provides a wide array of sessions and events. How can new captive sponsors, as well as those new to the captive industry, get the most out of the conference?

Captive Immersion will be held on Monday as an optional new component to the VCIA conference. Captive Immersion is designed to familiarize new captive industry professionals with the essentials of captive insurance. The key services needed for captive formation and management will be presented by industry experts to give newcomers a complete sense of the process and services and their importance in the overall captive picture.

We are also incorporating Learning Circles, where attendees can share their experience with up to eight peers and vice versa, with an ambassador as a guide to help facilitate and support the process. Your Learning Circle is an adventure you'll experience together on a mutual quest to dive deeper and apply the vibrancy of ideas and innovations you'll encounter at VCIA's Annual Conference. Through this process, they'll discover the value of gaining new perspectives and ideas from fellow circle participants while developing connections with new peers.

As always, we present interactive sessions for all levels exploring trends in our rapidly evolving industry, allowing attendees to earn Continuing Professional Education (CPE)/Continuing Legal Education (CLE)/International Center for Captive Insurance Education (ICCIE) credit. Attendees can discover innovative strategies and get tips and tools from industry experts—panelists, who are captive owners from some of the most prestigious organizations in the world, speak at VCIA.

One of the most important aspects of the conference, according to attendees, is the ability to network with colleagues, peers, and mentors. All the industry's key players will be at the VCIA conference! With sessions such as Developing the Next Generation of Captive Industry Leaders, Young Professionals' Forum, and the Captive Owner Forum, as well as the myriad networking lunches, reception, and after-hours events, the conference is a great source for captive career development and networking.

On top of that, we have nearly 100 companies exhibit at the conference, featuring the newest industry product and service developments, and a tour for captive owners at Burton Snowboards in Burlington!

Tell us about sessions that will be especially useful to those with many years in the captive industry?

The VCIA conference will have many sessions that I believe will be especially useful to captive professionals with many years in the industry. Some of the more advanced sessions include The Efficient Captive Frontier: Finding the Right Balance of Risk and Reward. For many captive owners, on the other hand, risks are often considered in "silos"—the actuary looks at retained insurance risk, the investment manager looks at asset risk, etc.—and no one ever steps back to consider the potential interactions between these risks in a meaningful way. As a result, it is easy for companies to miss opportunities to get more value out of their captives. This session will explore the benefits of taking a more holistic view of risk and lay out practical ways to do so.

Captive as "Laboratory": Creating New Products To Meet New Challenges will show attendees how their captive can serve as a "laboratory" for quantifying and insuring new risks faced by the parent. During this session, we will review some recent product innovations implemented by captives, review a case study, and listen to a product development specialist describe the opportunities and challenges of pioneering new insurance products to meet emerging needs.

For those in the healthcare arena, our Association Health Plans and Captives: New Regulations, New Opportunities session will explore the new options to insurance professionals across the country with the greater embrace of association health plans by the federal government.

And finally, attendees can join Mr. Provost, Vermont's deputy insurance commissioner, and our other highly experienced panelists, for an engaging and interactive discussion on current hot topics impacting the captive insurance industry. In what is always a highly regarded session, panelists will examine current developments in captive regulation and key issues facing the industry as well as highlight future initiatives and new opportunities for growth.

What is one of the key themes at your conference this year?

Without a doubt, innovation is a key theme to our conference this year. Whether it is InsurTech, blockchain, artificial intelligence (AI), or the use of other technology, the captive insurance world is changing quickly.

Drones and artificial intelligence technology are increasingly being used to assist risk managers in pricing and claims management. Attendees at Drones, Sensors, and AI: Elevating Insurance and Risk Intelligence will learn the merits and limitations and how drones and AI are being utilized to perform complex analytics, generate 3-D models, evaluate insured exposures, and assist in claim assessment when access to the physical site is limited due to structural or environmental risks.

At our Innovation Spotlight: Innovative Uses of Captives session, a panel comprised of a captive owner, data management service provider, and rating agency professional will help risk managers and captive owners consider innovative ways to solve problems, manage risk, and measure innovation in their organization.

And finally, at our General Session, Laura Drabik, group vice president of business innovation for Guidewire Software, will share her expertise on the dynamic ways that technology and insurance are intersecting. Ms. Drabik will speak on disruption and innovation in the insurance industry, as well as tech's bold new contributions to insurance.

Congress, the Internal Revenue Service (IRS), and courts in recent years have taken actions impacting captives. Will there be a session dealing with those actions?

As always, captive professionals of all stripes love to hear the update on recent tax cases relating to captives with Bruce Wright, Tom Jones, and Chaz Lavelle. Our tax experts will explore the potential effects of the principles in the recent section 831(b) cases (Syzygy case) and discuss the position taken by the Washington State director of insurance regarding nonadmitted insurers (like Microsoft's captive). The Johnson & Johnson case related to direct placement taxes will be covered, as well as how the 2017 Tax Act's passive foreign investment company provisions may cause some insurance companies to move onshore. We will take a look at a New York case that could have ramifications regarding state income and direct placement taxes and the impact of "economic substance" on domestic and foreign captives, as well.

We also will be presenting The Past, Present, and Future of Qualifying as an Insurance Company. Traditional thinking in structuring captive insurance companies is evolving to take into consideration recent court rulings, new actuarial methodology, and the ever-evolving IRS. Attendees to this session will learn about safe harbor rulings and court cases related to how captive insurance companies have qualified as insurance companies.

Looking ahead, what changes is VCIA considering for the conference?

Honestly, we won't consider changes to next year's conference until after this one in August. But come September, VCIA takes a few days to review the conference evaluations, as well as input from VCIA's board of directors, conference task force members, and a number of key captive insurance professionals to analyze what worked and what did not to begin the process of planning our 2020 conference.

The results from last year's conference were excellent overall, with 86 percent of those responding rating the conference the best or better than most. On a scale of 1–5, seminars ratings ranged between 4 and 5 with the average score being 4.6. Evaluations tell us that the vast majority of attendees enjoyed the conference immensely, and that it is a good investment of their time and money. Based on feedback, attendees enjoyed the sessions, the speakers, and the chance to meet people they work with face to face. The conference had great energy—people liked the fresh format changes and extra touches. The learning formats and interactivity of the event were also held in high standing.

(Photo of Mr. Smith, above, is courtesy of Vermont Captive Insurance Association.)

Copyright © 2019, International Risk Management Institute, Inc.

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