Located on the east coast of the US, Vermont is recognised for the creation of Ben & Jerry's ice cream brand and is the largest producer of maple syrup.
Perhaps the sweet treats on offer have attracted so many businesses to domicile their captives within the state. Vermont’s captive insurance industry was first established in 1981 by then-governor Richard Snellings who signed the Special Insurancers Act.
Almost 40 years later and it is now home to 559 captives, as of the end of 2019.
So far this year, Vermont has been busy in terms of captive formations, with 20 new licenses and several applications in process.
According to industry participants, one of the primary reasons for new formations is the hard market cycle businesses are facing, making the renewal of coverage tough in terms of pricing, capacity, and availability.
With a positive start to the year, how will the ongoing COVID-19 pandemic affect the state?
Coping with COVID?
Each year, the state welcomes attendees of the Vermont Captive Insurance Association (VCIA) conference. However, due to COVID-19, VCIA made the decision to host this year’s conference virtually.
At the time of writing the US has over four million cases of COVID-19. But how has the pandemic affected the captive insurance industry in Vermont?
Dustin Partlow, senior vice president at Caitlin Morgan Captive Management, suggests that Vermont’s captive insurance has “coped very well with the ongoing pandemic”.
Given how rural Vermont is as a state, Partlow suggests that much of the industry, including service providers and the regulators, were already set up to work remotely and many were already working remotely on a regular basis.
Partlow explains: “As things have started to open up again and we have seen how the commercial insurance market has reacted to increased premiums, lower capacity and continued reductions in coverage terms and additional exclusions, it has led to more interest in analysing alternative risk solutions such as captives.”
One of the worst-hit industries during the pandemic has been nursing homes. Partlow says: “We have started to see increased interest in this industry of utilising captive structures as part of their risk financing solution as the few remaining carriers in the space have ceased writing coverage, have significantly increased their premium pricing, and have added various exclusions for exposure related to communicable diseases such as COVID-19.”
Also discussing how Vermont’s captive industry has coped during the pandemic, Sandy Bigglestone, director of captive insurance, Vermont Department of Financial Regulation (DFR), says the state has seen almost “no disruption” doing business remotely.
She says: “We understand that while all businesses will be impacted by the pandemic in various ways, we recognise that some will be affected more than others.”
“Through our solvency monitoring processes, we will prioritise cash flow and liquidity risks, and expect to see certain results, including investment income declines, decreases in premiums, increases in claims for specific lines of coverage, or a slow-down of claims if operations ceased for a period of time,” she explains.
Bigglestone notes that the Vermont DFR established a COVID-19 task force to research and gather information relevant to the pandemic, to evaluate and monitor possible impacts on captives and their owners.
“Undoubtedly, businesses are already experiencing operational and liquidity strains due to the pandemic. Formation of a captive to finance and manage risk at reasonable rates is an attractive proposition. Whether or not companies will seek to address future pandemic risk or expansion of business interruption coverages remains to be seen,” Bigglestone adds.
Billing on changes
Early in June, Vermont’s governor Phil Scott signed new legislation to strengthen the state’s captive insurance laws, increasing efficiencies as well as adding flexibility to regulatory policy and procedures. The captive bill includes new policies related to Vermont’s captive protected cells. The changes in the law include providing simplified disclosure for agency captive owners; allowing regulatory discretion in setting the capital of an uncapitalised dormant captive to keep their captive intact at minimal cost, for future reactivation in Vermont; and reducing the minimum core capital for a sponsored cell captive from $250,000 to $100,000.
The bill also allows flexibility to insure unaffiliated business in a cell under the same circumstances as might be allowed in a stand-alone captive and will help keep the captive option open.
Additionally, it explicitly allows cells to form separate accounts within a given cell. The provisions mirror those applicable to standalone captives and extend the protections of statutory clarity.
Other changes to the bill include; flexibility in investments by giving sponsored captive companies, and the cells within said companies, the option to follow the old rules or develop a plan for Department of Financial Regulation approval; and specifying the timing of examination reports for risk retention groups to align with the National Association of Insurance Commissioners accreditation standards.
Commenting on the new legislation, Mary Desranleau, senior vice president, captives, Vermont at Artex Risk Solutions, says: “The key changes are related to sponsored cell legislation. Cells have been in place a few years now and as they develop over time regulations adjust to allow them to be more effective and efficient.”
“The reduction in the sponsored cell captive minimum core capital has also allowed Vermont to remain competitive with other domiciles, while still insuring proper levels of capital,” she adds.
Richard Smith, president of the VCIA, also suggests that the enhancements included in this year’s bill highlight the VCIA’s “ability to work closely in partnership with Vermont’s Governor and state legislature to ensure its captive law remains the industry benchmark”.
Commenting on the protected cell legislation, Smith noted that protected cells are a popular alternative risk transfer mechanism worldwide and are a growth area for Vermont.
He adds: “Cells are more and more often operating like stand-alone captives, addressing similar issues and opportunities. One of the key changes recognises the importance of cells in the captive industry and makes it clear that a cell can operate – and should be regulated – much the same as an individual captive.”
Trends
Reflecting on the trends that the state’s captive industry is currently seeing, Patricia Henderson, director, operations and compliance at Strategic Risk Solutions (SRS), suggests that during the current unprecedented times, existing Vermont captives are being tapped to loan back dividend surplus funds and/or to defer/waive premium payments to support core initiatives, growth or even survival itself back at the parent.
Henderson explains: “They are being asked to explore new lines and bridge coverage gaps, as well as to absorb larger self-insured retention and write higher excess to lower the impact of commercial insurance and reinsurance premium increases.”
Patrick Theriault, managing director SRS East operations, reveals that the demand for new captives has seen a marked increase over the last six months as companies try to proactively predict and adjust to this new normal environment of uncertainty and change.
“Meanwhile, interest in using captives to address healthcare costs via medical stop-loss insurance involving captive insurers has continued to remain of significant interest,” he adds.
Bigglestone suggests another trend is companies are favouring increases in their risk retention because of the hard commercial market.
She notes that Vermont is experiencing growth in terms of new captive formations and upsizing of existing captives through approved business plan changes. The rise in business is with more of the traditional/commercial type property and casualty coverages.
“I am hoping the shift in the market will help group programmes retain and attract new members,” she adds.
Smith suggests that even before the COVID-19 virus spread worldwide, the insurance market had begun to harden in several lines, impacting the overall industry.
She explains: “Higher prices, more exclusions, and a lessening of capacity creates the kind of environment where risk managers look at the alternative market to manage their organisations’ risk. Talking to many of my members at the end of last year and the beginning of this year highlighted a growing interest in the captive insurance market.”
“Sure enough, Vermont has already licensed 17 new captives as of a few weeks ago and their pipeline of activity is still full. As a matter of fact, notwithstanding the pause in activity COVID-19 has caused across the economy, Vermont expects a robust end-of-the-year with feasibility studies and formations,” Smith adds.
Obstacles
One of the biggest challenges Vermont faces is how to ensure the state holds its ‘gold standard’ in terms of captive domiciles, according to Partlow.
With more states in the US becoming captive domiciles, and using Vermont’s captive statute to create their own captive legislation, Partlow says it’s “more important than ever for Vermont to continue to find ways to distinguish itself from those other domiciles”.
However, with “people such as Smith at the helm of VCIA and Dave Provost, deputy commissioner captive insurance division at Vermont DFR”, he explains Vermont is in a “great position as a domicile to ensure it continues to be at the forefront of the industry”.
Desranleau also suggests that although Vermont is facing the challenge of remaining competitive with other captive domiciles, and maintaining a high level of standard, it is allowing changes to compete with other captive domiciles.
“I’m not overly concerned as Vermont has been in this industry a long time and has been able to remain very competitive, with high standards,” she adds.
In addition, Partlow suggests that the one significant challenge is in regards to self-procurement taxes. He states: “Should more states begin to get more aggressive in terms of their pursuit of self-procurement taxes, it may lead more companies to look at domiciling their captives in their parent company home state.”
“This is one of the greatest threats to the captive industry in the State of Vermont, and unfortunately with the extensive financial ramifications of the virus, it is believed many states may step up their pursuit of additional tax revenue”, he adds.
Future
Looking towards the future, Smith believes that Vermont will continue to see increased interest in the captive industry for the next 12 months or more – and the state will continue to play a leading role in the space.
“Although captives will play an increased role in risk management and risk finance, there will also need to be time to reflect and analyse the impact of the pandemics to see where captives can play a constructive role in the future,” he notes.
Desranleau and Partlow also predict that the captive industry will have significant growth in Vermont over the next 12 months in terms of new formations.
Partlow explains: “The current commercial market conditions which I expect to only intensify in the coming months will lead to an increase in interest in captives."
"I firmly believe Vermont will continue to see an increase in interest in the formation of cells, single-parent captives and also risk retention groups.”
Elsewhere, Henderson highlights that Vermont will need to “remain vigilant” in its COVID-19 response, especially as the predicted second wave hits and countermeasures playout/expire.
She explains: “Regulators and captive service providers alike need to institute safeguards against employee burnout and be able to address other stress factors outside the usual captive and insurance realms.”
“We expect DFR to continue to offer flexibility such as they have done with waiving in person Vermont board meeting attendance and deferring notarisation requirements, in addition to the various business plan approvals concerning loans, dividends, return of capital and premium waivers/holidays etc,” Theriault concludes.
