Celebrating its 40th anniversary as a captive insurance domicile, Vermont has already licensed over 20 captives so far this year. Industry experts discuss market trends, legislation updates and more
Known for its gold standard, Vermont is celebrating its 40th anniversary as a captive insurance domicile this year. Like the overall captive insurance industry, Vermont saw a large influx of captives licenses last year and at the beginning of this year too. In 2020, Vermont saw 38 captives licensed compared to a ‘normal’ year where the domicile would see between 20 to 25.
The main cause for the increased activity has been the hardening market in the traditional insurance industry in almost every commercial line that captives cover.
Richard Smith, president of Vermont Captive Insurance Association (VCIA), reveals that this year, the state has already licensed over 20 captives so far.
With the bulk of captives being licensed at the end of the year, Smith says it will be interesting to see how this trend continues to develop.
“Every member I have spoken to in the past six months or so tells me they are swamped – not a bad thing to have to deal with,” he adds.
Legislation
Vermont has a reputation of being a popular domicile for all types of new captives in a variety of industries due to the knowledge, flexibility and willingness of the state’s regulatory staff to be open to new, creative solutions.
On 12 May, Vermont governor Phil Scott signed a new captive bill into law, which aimed to strengthen the state’s captive regulation in a variety of areas.
The bill made several updates to the state’s captive law, including clarifying the ability for a cell to convert to another type of entity, and simplifying processes around redomestication, mergers, and the filing of organisational documents prior to licensure.
It also saw changes to the captive formation process, which amends the statute to no longer require certified copies of organisational documents and contribution of capital prior to licensure.
Instead, capital may be contributed after licensure, and the company is required to file a statement to that effect with the department. Reports and statements, where agency captives are added to the list of companies required to file an annual report.
Meanwhile, protected cell conversions will now provide the ability for protected cells to convert to a standalone captive insurance company or to a different type of cell.
It will also see consolidations of captives simplify the merger process, provided there is unanimous consent of the parties. It creates a new section in the captive statute instead of referencing the traditional statute.
A new section has also been created for redomestications instead of referencing the traditional insurance statute.
Finally, for service of process, it has changed the designated agent for service of process for foreign risk retention groups and purchasing groups doing business in Vermont from the Secretary of State to the Commissioner.
Monica Birchmore, account manager, Hylant Global Captive Practice, says the recently signed legislation will simplify multiple processes for captive insurance companies.
“In my experience, Vermont as a domicile has always prided itself on improving the legislature and looking ahead by identifying trends and changes that will make Vermont an even more well-rounded domicile for captives,” Birchmore adds.
Blockchain
In 2019, the Vermont Department of Financial Regulation (DFR) and the Office of the Vermont Secretary of State (SoS) collaborated on a pilot programme that explored the use of blockchain technology in the captive insurance market.
The pilot was set up to experiment with the functionality of blockchain in state regulatory processes. It was also designed to review and revise relevant statutes, rules, regulations, and bulletins to ease the implementation of blockchain technology.
Commenting on blockchain within the captive market, Smith says: “Blockchain continues to be experimented within the traditional and captive insurance industry. There are many instances of blockchain being utilised in annual policy renewals, premium payments and claims submission and settlement.”
Although there has not been widespread adoption of blockchain in captive insurance utilisation, Smith comments: “I do believe it will become more important in the years ahead.”
One area that seems primed for blockchain is the use of parametric coverages in captives (and on the traditional side as well), according to Smith.
Parametric insurance — also called index-based insurance — is a non-traditional insurance product that offers pre-specified payouts based upon a trigger event.
Trigger events depend on the nature of the parametric policy and can include environmental triggers such as wind speed and rainfall measurements, business-related triggers such as foot traffic, and more.
Smith explains: “Linked to blockchain technology parametric insurance eliminates the arduous and lengthy claims process and reduces broker and administrative fees, as it relies on a simple formula: if the event is triggered there is an automatic payout.”
Market developments
The past year and a half have been difficult amid the pandemic, but the Vermont DFR has been understanding of all of the complications that the pandemic has created.
One example of this, according to Birchmore, was swiftly adjusting the requirement to conduct annual meetings in person to maintain the safety of all parties involved.
She notes: “I believe Vermont has been extremely accommodating by listening to requests from both captive managers and captive owners on how to efficiently and effectively manage capital/surplus, rising insurance rates and remote board meetings.”
Elsewhere, Brittany Nevins, captive insurance economic development director at the Vermont Department of Economic Development, highlights other developments within the state including the increase in formations related to long-term care facilities and the continued interest in the use of cells (leading to the formation of more sponsored cell facilities).
“In several instances, we have seen companies convert an existing captive to a cell facility, and then use cells to segregate new and existing lines of business,” Nevins explains.
There has also been several captives or cells as part of the insurance placement for western wildfires, which Nevins says she expects to see more of that as the severe drought continues.
Opportunities
With the continued hard markets, there are opportunities for Vermont to grow captives in every category of risk.
Smith notes that Vermont is seeing a lot of growth in the use of cells and the legislation described earlier gives more flexibility for converting a cell as the needs of the cell owner evolve over time, making the decision to establish a cell captive more attractive.
He says: “In many instances, cell captives are becoming more attractive than forming a new standalone captive in that they can accommodate all types of businesses, provide greater operating flexibility, lower capital requirements and are more efficient.”
Meanwhile, Birchmore suggests the opportunities lie in the ability to bring new ideas along with new solutions to the regulators and have it be met with a knowledgeable staff that are excited to be a part of solving either an old or newly discovered business issue with the captive as the driving force.
“I have always felt as though the access to Vermont’s captive regulatory experts has been one of their greatest assets as a domicile.”
“They are always willing and happy to have a discussion to talk through any and all ideas, listening thoroughly to the thoughts being brought to their attention and providing their expertise to further develop a solution,” Birchmore adds.
Conference
The VCIA conference is due to take in a virtual format for a second year between 10 and 12 August. The association opted for a virtual format to make it accessible to all who wish to participate.
Commenting on the event, Smith says: “We bring together high-quality captive insurance education, with panellists who are captive owners from some of the most prestigious organisations in the world, where the industry can learn from the best and brightest.”
Educational sessions will continue to discuss emerging and current risks, and how captive programmes relate to those risks. Content is developed for newcomers and veterans alike.
Building on the success of last year’s event, VCIA will be offering more ways for small groups to connect, and one-on-one meetings.
Instead of an Exhibit Hall this year, VCIA is offering Solution Labs.
Smith says: “The idea behind the Solution Lab is that our members offer solutions to a particular challenge being faced in the captive community.”
Also new to this year’s event are Ignite Talks. “An Ignite Talk is a high quality, brief Ted Talk-style of presentation which pitches a particular idea to an audience.”
“VCIA will be hosting Ignite-style presentations at the 2021 conference for service providers to present to the captive community.”
“The Ignite presentation will speak to one of the challenges now being faced in the captive industry,” he adds.
