With sustainable growth so far this year, Vermont remains the leading US captive domicile. Christine Brown and Ian Davis discuss recent developments in the state
With sustainable growth so far this year, Vermont remains the leading US captive domicile. Christine Brown and Ian Davis discuss recent developments in the state
How has 2018 been for Vermont?
Christine Brown: We had a very strong start to the year, with 12 licenses issued in the first half of the year and three in review now. We’ve had a lot of really productive meetings, so we have a healthy pipeline of prospects too.
We are definitely keeping busy and expect our licensing numbers to be similar to the average we have had over the last few years, which is between 20 and 25–numbers we are happy with. This steady sustainable growth speaks to our fair but firm regulatory approach. We’ve never been about chasing numbers, but we are also very welcoming and want to hear about people’s insurance and risk management needs and want to try to help provide solutions.
We don’t include cell formations in our licensing numbers, but we’re definitely seeing a growing interest, there have been six to date. Cells can be like their own little insurance company in a lot of cases, so they require the same amount of work on our end during the application process.
We want to make sure they can stand up on their own, from a solvency perspective, and incorporated protected cells have all the same governance documents that your typical pure captive would have. These formations have been keeping us busy, but it’s not as transparent because they aren’t included in our numbers.
Have there been any regulatory developments?
Brown: Apart from the affiliated reinsurance company (ARC) legislation things have been pretty quiet, which is a welcome change given the number of changes in the last few years with the adoption of governance standards, holding company regulations and credit for reinsurance. We did have some minor changes or enhancements that were included in our annual housekeeping bill passed this spring. Nothing major, the most notable would be our extension of the premium tax due date from 1 March to 15 March to coincide with the annual report filing due date. It made sense from a business perspective.
About six months ago, we hired Rebecca Aitchison, an in-house examiner, who came to us with over 25 years of experience as a captive manager. She has brought some excellent outside perspective for improvements in our processes and communication with the captives we regulate and the service providers.
Do you have any plans in the pipeline?
Brown: We typically meet with our industry partners in the fall to discuss legislative changes for the upcoming session.
There’s nothing big on the horizon yet, but that’s not to say something won’t come up.
We are always looking for ways to make our processes more effective and efficient and have a few different projects going on to that end.
We are developing a compliance manual, which is intended to provide supplemental information to our laws and regulations and consolidate the guidance we’ve put out there over the years via memos. We’re also developing new application forms for different types of captives that will include specific guidance on our requirements with the goal of making the application process easier.
Cybersecurity is front of mind and touches all industries and companies, regardless of size.
The Vermont Captive Division is developing guidance for best practices as they relate to IT general controls and cybersecurity, including response plans and steps to take should you become a victim of a security breach. We’re also in the process of updating our website, to be launched at the end of 2018, which will be more user-friendly and include downloadable checklists and other resources for users.
Vermont has been planning on working with the secretary of state on blockchain and captives, how is this going?
Brown: My understanding is that we are partnering with the Vermont Secretary of State to use the blockchain technology when we are issuing Certificates of Authority during our licensing process.
The thought behind it is that it would be a good test case for Vermont to get people to understand how it works given the low volume of transactions and little to no risk involved. The Department of Financial Regulation is working on a study on the potential applications of blockchain technology to the provision of insurance and banking. We have been conducting interviews with domestic insurance companies and interested parties to obtain input as to current uses and the future of insurtech and blockchain in the insurance industry.
The goal, I believe, is to prepare a report for our legislators to help them better understand the technology and its potential uses to make related legislative decisions.
This is a great example of Vermont’s innovation and our ability to work with our lawmakers to stay on the cutting edge and respond to the latest developments impacting our industry.
Ian Davis: This is a very topical issue at the moment, at any conference these days blockchain and emerging technologies are always discussed. In Vermont, we are continuing to be as proactive as possible.
In addition to working with the Secretary of State’s office, we are conducting working groups, holding educational forums and really doing our best to position ourselves well to help regulate these emerging technologies.
We certainly believe their collective impact on the insurance industry is going to be substantial in terms of managing data, identifying risks and managing exposures, but again we want to position ourselves to be at the forefront.
Technology is so pervasive today, if insurers aren’t beginning to consider incorporating them into their business plan, then they will be behind the eight-ball.
What motivations were behind the new ARC legislation?
Brown: We were approached back in March to help figure out a solution for US insurance companies that were using offshore ARCs and negatively impacted by the Base Erosion Anti-Abuse provision (BEAT) included in the recent US Tax Reform.
BEAT only applies to the payments made to offshore affiliates, so third-party reinsurance isn’t impacted, but many US insurers may want to maintain their ARC, which provide effective capital management and operational control.
We were able to work with our legislature to pass a bill in May that allowed the licensing of this new type of captive.
This structure is one of several options for US insurance companies seeking to avoid the adverse tax implications.
The ARCs will be subject to the laws and regulations that are promulgated by the National Association of Insurance Commissioners (NAIC) under accreditation standards, so we will regulate them similarly to risk retention groups but the law allows some investment flexibility, which is one of the benefits of offshore reinsurance arrangements.
The companies will need to submit an investment policy to us for regulatory approval during the licensing process, and that policy needs to address diversity and provide for sufficient liquidity in line with the NAIC standards. Vermont wanted to help companies keep their underwriting profits in the US by allowing them to cede to a US affiliate instead of an offshore affiliate. The speed with which it passed showcases our relationship with our lawmakers and their support of the industry.
What impact do you expect the ARC legislation to have on the industry?
Brown: The ARC option is currently available, and we’ve had a couple of serious conversations. We hope to have a couple of licenses issued this year.
We’re not anticipating a large volume of formations, or a growing trend, our intention was to respond to the need in the industry and create an on-shore solution.
We encourage US insurance companies to review their foreign reinsurance arrangements with tax professionals to understand BEAT better.
What state do you think the captive market is in at the moment?
Brown: Even though the market is soft, the alternative risk market and captive industry continue to grow.
As the risk environment changes, with things like cybersecurity threats, changing federal and state regulations, and emerging technology, people are very creative in figuring out what can fit within the captive framework.
One of the best things about being in this industry is the innovation we see.
