Vermont Captive Insurance Leader Discusses Emerging Areas, Challenges

Vermont is the leading onshore captive insurance domicile. The Green Mountain State now has over 900 captives, having licensed more than four times the number of captives than any other domestic competitor.

Richard Smith, president of the state’s captive industry group, Vermont Captive Insurance Association, recently spoke with Insurance Journal to discuss emerging areas — from employee benefits to cyber risk — and new challenges facing this industry. (A podcast of the interview can be found on www.insurancejournal.tv.)

The association held its annual conference this past summer in Burlington, Vermont. This year’s event attracted more than 1,000 attendees from 42 U.S. states and eight countries. The conference presented 22 seminars and educational roundtables.

Smith said one of the more prominent seminars this year was a session that discussed using captive insurance for employee benefits.

“It’s an emerging area in the captive industry. We had the folks from YKK of North America as panelists for this session,” Smith said. “Their human resource and risk management teams have put together a program in their captive that serves the needs of both the employees and the company itself in terms of employee benefits.”

There was also a lot of discussion around health care, both the use of captives in the health care industry as well as the new health care reforms that are coming down from the federal government, Smith said. These discussions explored how these changes might impact captive insurance companies, especially those in the medical field.

He said there’s been a lot of discussions about emerging lines. “We mentioned employee benefits as an area that we’re seeing continued interest in, although, at this point, I haven’t seen a lot of growth in that area. More and more, we’re seeing parties that are interested in the potential there,” Smith said.

“I think every time you see a major risk event, such as the flooding in Thailand that impacted supply chains, you’re going to hear, ‘Can captive insurance handle those issues?'”

Cyber risk is another area that’s generating a lot of discussions these days, according to Smith.

“I think anything hot in the insurance world is being talked about in the captive industry as well, in terms of, ‘Is that an appropriate program to put into my captive insurance program?'”

He observed there is a lot of positive energy about the captive industry — and a lot of energy and interest in captive formation, new areas and new lines of business that are being explored.

“Even though the economy hasn’t truly bounced back yet,” he noted, “we’ve seen over the last couple years that the growth in the captive industry has remained steady and strong.”

But on the other hand, the captive industry is also facing new challenges.

One thing that has caused some confusion is language in the Dodd-Frank Act called the “Non-Admitted and Reinsurance Reform Act.” It’s a portion of Dodd-Frank that was meant to better deal with surplus lines tax collection amongst states.

Unfortunately, he said, because of the language of how that particular part of the act was developed, there’s confusion as to whether captive insurance companies fall within that definition. “This has created angst and confusion within the industry, which is not helpful to the industry as a whole,” Smith said.

“The ever-present concern about the creeping regulatory apparatus of Washington, D.C., impacting the industry in a way that’s not helpful to the industry or to those who are involved in the captive insurance world was on many people’s minds,” Smith observed.

Smith also expressed some reservations about the recent trend of additional states enacting captive-friendly laws and becoming captive domiciles. He called this development “a double-edged sword.”

While healthy competition is good for Vermont as well as for the captive insurance industry as a whole, he cautioned that some states might lack a long-term commitment.

“What we’ve seen recently though, is many states have looked at Vermont and other successful captive domiciles, and said, ‘Gee, they seem to be getting some decent premium tax from this industry. Let’s pass laws that allow us to establish the same kind of industry in our state,'” he said.

“And I understand that. With the economy where it is, the state and federal government facing fiscal challenges, I understand why state legislators, or governors, or both, are looking at this and seeing a potential revenue source.”

“My concern is,” Smith cautioned, “and what we’ve seen in the past is, some states form domiciles and are initially very positive and put some resources in, but if there’s no immediate payback, then too often the support from the leaders of that state starts to fade. I don’t think that’s helpful for the industry,”

Topics Trends Leadership Vermont