Vermont is a major hub for captive insurance—the largest captive insurance domicile in the US and the third biggest in the world in terms of the number of active captives.
Vermont is a major hub for captive insurance—the largest captive insurance domicile in the US and the third biggest in the world in terms of the number of active captives.
Vermont has 1,137 total captive licences overall, with 558 active captives. Vermont licensed 25 new captives in 2018 and had 24 new captives licensed in 2017, showing its continued growth.
Ian Davis, director of financial services at the Vermont Department of Economic Development, says: “We are very proactive in terms of our marketing, communications and outreach efforts. The aim, ultimately, is to help ensure that the captive concept is well understood and communicated, including the benefits of being in a reputable onshore jurisdiction like Vermont.”
“One of the most effective ways we can do that is by showcasing Vermont-domiciled captive owners. Fortunately, the majority of our captive owners are passionate about the industry and are willing advocates for both their programs and the state.”
“My role as the chief marketing and business development professional for the state is to help communicate those strengths to prospective captive owners through traditional marketing and communications activities, thought leadership and legislative advocacy.”
The captive statute
Earlier this year in Vermont, S.109, a consensus bill passed, that was composed by the state’s Department of Financial Regulation (DFR) and the Vermont Captive Insurance Association (VCIA) after being presented to the Vermont General Assembly.
The consensus bill involved updating part of the captive insurance statute in the state’s 2019 legislative session.
Vermont governor Phil Scott signed the bill into law that will seek a small number of changes to the statute. This included tweaks to amend the statute to identify nonprofit protected cells being eligible for dividends or distributions with commissioner approval and allowing the commissioner to excuse the attorney-in-fact from the bonding requirements under specific conditions.
The bill also suggests clarification of the definition of an independent director; a requirement for National Association of Insurance Commissioners statutory accounting for related reinsurance companies, the new captive structure introduced in the state last year; and specific inclusion of sole proprietorships among eligible businesses to be cell participants.
It would also allow captives to use any organisational form authorised by Vermont law, meaning the captive law will automatically stay current, and the Vermont Department of Financial Regulation (DFR) still has lots of opportunities to decline an application or reject a business form if not appropriate for an insurance company, or a specific circumstance.
Other tweaks in this bill include requiring captives to be examined every five years, or more frequently if necessary, rather than every three years, which can currently be extended to five if the captive is audited.
Davis explains: “Each year we introduce legislation, be they technical amendments or more substantive changes, to help ensure that our captive statute remains clear, consistent and continues to position Vermont at the forefront of the captive industry.”
“In this instance, the intent of the technical amendment was to better reflect, in statute, the state’s practice of prioritising examinations based on assessment of the company’s risk.”
“The vast majority of our companies were already on the five-year plan, so there was not a real practical effect; now the default is five years instead of three, but the examinations will still be priority based.”
“This practice of annually updating our captive statue also allows our state policymakers to stay engaged with the industry and is reflective of a domicile that is not content to rest on its laurels.”
Cannabis
Within the past few years, a liberalising view on cannabis use has grown in Western societies resulting in the growing trend of legalisation of cannabis for medical use in the US.
Some 31 states, including Washington DC, Guam, and Puerto Rico, have already legalised cannabis for medical use, while nine permit recreational use.
This legislation has led to growth in the market, with cannabis sales reaching an estimated $9.7 billion in 2017. This market is expected to continue to grow as more and more US states and countries legalise medical cannabis.
By 2021, the international market is predicted to be worth $31.4 billion. This opens the window for the captive insurance market to position itself as an answer to the unique risks posed in the cannabis industry.
However, for Vermont, this door is still closed. Davis states: “Vermont legalised the recreational use of cannabis in 2018, and we understand that some captives are writing cannabis risks in other states.”
“That said, as of now, we continue to be of the mind that as long as cannabis remains a schedule 1 substance at the federal level, we will not be able to licence these types of captives in Vermont.”
Blockchain
For captive owners and managers in Vermont, blockchain could prove to be an answer to many new challenges.
Blockchain is a digital ledger technology designed to create a clear and validated record of transactions, which provides users with more efficiency, accuracy, and security than traditional record-keeping methods. It has become more popular within the captive sector as digital security becomes more of a hot topic.
Earlier this year, the DFR and the Office of the Vermont Secretary of State collaborated on a pilot programme that explored the use of blockchain technology in the captive insurance market.
Recently, the Distributed Ledger Governance Association (DLGA) have set up a captive insurance working group in Vermont. The non-profit focuses on the blockchain industry.
Davis explains: “This is a very topical issue at the moment, and we certainly believe that blockchain and other emerging technologies will have a substantial impact on the insurance industry.”
“Our captive team continues to have robust discussions with companies around blockchain and its potential uses and benefits, however, at this point, we have yet to see anything implemented.”
“That said, as a leading captive domicile, we have an obligation to keep up with these developments, and have recently launched a blockchain pilot program of our own to further explore its uses in the digital recordkeeping practices of the captive industry.”
“The goal of the pilot is to examine whether or not the application of blockchain technology can improve aspects of the captive regulatory process, including providing increased efficiency, accuracy and security.”
As Vermont faces these many important and new trends, it will likely continue to hold its place as the largest captive insurance domicile and grow.
