Vermont’s Captive Industry Celebrates 25th Birthday

By Ross Sneyd | August 11, 2006

More than 1,200 people showed up in South Burlington, Vermont this week to celebrate the 25th anniversary of an idea cooked up in Al Moulton’s kitchen that has grown into a multi-million-dollar industry and top employer for the state.

Although the captive insurance industry is not well known — and is not terribly well understood even by those who are aware of it — it has become one of the state’s leading employers and generates enough tax and fee revenue to support roughly 3 percent of all the state’s general fund spending.

The industry is in the midst of its annual convention, described by sponsors as the largest of its kind in the world, drawing lawyers, accountants, auditors and other professionals who support it.

Although no one has a good estimate on the total payroll associated directly with the industry, a 2003 study found it supported 1,400 jobs with salaries paying 70 percent higher than the Vermont average and generating an estimated $100 million economic spinoff. It produced $23 million in premium taxes and licensing fees for the state treasury last year and draws thousands of annual visitors for conventions, annual meetings and other business.

“If that was a single employer, that would be a top 10 employer,” said Daniel Towle, financial services director at the state Economic Development Department.

And it got its real start around 1980 when H. Lincoln Miller, a Long Island, New York, insurance broker, sat down at the kitchen table with Moulton, then the state’s development secretary.

Large corporations were trying to create wholly owned subsidiaries through which they could insure themselves against property loss, casualty and liability. The subsidiaries became known as captive because they provided insurance to only one company, their corporate parent. Most of those subsidiaries had to incorporate outside the country, such as in Bermuda, because there were few states with corporate law that permitted what they wanted to do.

So Miller, who had a vacation home in Quechee not far from Moulton’s home, decided to see if Vermont would be interested.

“He sold the idea that we could develop a revenue stream for the state and bring people to the state and jobs and some things like that,” Moulton said, seated next to a traditional chocolate birthday cake thick with butter icing marking the occasion.

Moulton became intrigued and got then-Insurance Commissioner George Chaffee involved. Moulton and Chaffee ultimately took it to then-Gov. Richard Snelling, who liked it and helped guide it through the Legislature in 1981.

“He planted the seed and several of us cultivated the soil,” Moulton said of Miller. “It’s bigger than I thought it would be. It’s hard to comprehend.”

Vermont now plays host to 542 captive insurance companies, owned by such corporate heavyweights as Alcoa Inc., Exxon Mobile Corp., Microsoft Corp., The Walt Disney Cos. and Wal-Mart Stores Inc. The Vermont Captive Industry Association claims that 42 of the Fortune 100 companies have captive insurance subsidiaries organized and licensed in Vermont.

The state is attractive to those companies because its regulations permit them a great deal of flexibility, industry leaders say, although they’re also tough. “The size and reputation of its professional regulatory staff does not exist anywhere else,” Pamela Davis, president and chief executive of the Alliance of Nonprofits for Insurance Risk Retention Group, told the industry publication Business Insurance.

Lawmakers and gubernatorial administrations of both parties have modified the captive insurance regulations and laws almost yearly to keep the state attractive to the industry. Vermont is the third largest home to captive companies in the world, behind Bermuda and the Cayman Islands, and it has about three-and-a-half times as many companies as Hawaii, which ranks second among the states.

That sometimes has caused supportive politicians some headaches. Former Gov. Howard Dean, during his presidential campaign, was subjected to criticism for signing a bill in the 1990s that gave tax breaks to the industry, including a captive owned by Enron. His opponents called him a hypocrite for bashing Enron even though a law he signed benefited an Enron enterprise.

But Towle said a federal bankruptcy judge who oversaw the collapse of the energy giant found the captive insurance subsidiary was well regulated. “The industry holds it up as an example of good regulation,” Towle said. “The bankruptcy court held it up.”

Gov. Jim Douglas, who said that kind of regulation would continue, said it was difficult to overstate the importance of the industry to the state.

“It’s an economic niche that some pioneers determined would be a successful opportunity for Vermont a quarter century ago and they were right,” said Douglas, who visited the convention Wednesday. “It’s really been an important contributor to our economic success.”

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