It’s a US state most famous for the sweet offerings of maple syrup and Ben & Jerry’s ice cream, but Vermont has been proving since 1981 that it is in no way sugary-soft when it comes to captives.
It’s a US state most famous for the sweet offerings of maple syrup and Ben & Jerry’s ice cream, but Vermont has been proving since 1981 that it is in no way sugary-soft when it comes to captives.
After Bermuda and the Cayman Islands, Vermont is the third largest domicile in terms of captives licensed. It is also second in the world in terms of insurance company assets, and recorded 900 licensed captive companies as of December 2010.
The deputy commissioner of the captive insurance division at the Vermont Department of Banking, Insurance, Securities and Health Care Administration (BISHCA), David Provost, is confident that Vermont sets itself apart from other domiciles with current law and regulation, a large captive trade association (the Vermont Captive Insurance Association, or VCIA), and the expertise of players in the captive game.
“We have the most experienced and knowledgeable regulatory team anywhere,” he says. “As a result, applications are processed quickly, exams are cost effective and performed by experienced examiners, minimising your cost and your time. It also means that business plan changes are handled quickly, most in a matter of days, or quicker if needed.”
Climate control
In 1981, Vermont’s legislature passed the Special Insurer Act, which was designed to provide a unique and attractive statutory framework for captive formation.
The objective of the legislation was to establish a ‘business friendly climate’ for companies forming captive insurance operations.
The law permitted the creation of single parent, association and group captives, and stipulated reasonable capitalisation requirements that may be met with a letter of credit. It also allowed new captives to cover nearly all commercial lines, including excess workers’ compensation, directors and officers liability, and property and casualty insurance.
Also, the law did not require approval of rates and forms, or minimum premiums. On top of this, pure captives had no investment restrictions.
There was a slew of changes to the law in 2003, including a significant reduction in captive premium taxes, and the permission of pure captives to insure controlled unaffiliated businesses.
Since then, captives have been allowed to form as limited liability corporations, the process of converting a for-profit captive to a non-profit captive has been streamlined, and the rules for consolidating captives for premium tax purposes have been clarified. More clarification was needed just five years later, with a 2008 housekeeping bill creating a more flexible approval process for the use of letters of credit for captive capitalisation, and tightening up on financial security standards of the ‘attorney in fact’ of a reciprocal captive company.
Bolstering this regulation is BISHCA, the largest governmental staff of captive insurance professionals in the world. Alongside BISHCA is VCIA, whose membership is made up of management companies, law firms, banks and accounting firms.
A recent VCIA survey found that the largest industry sector that is served in Vermont is manufacturing, representing 19.7 percent of all Vermont captive insurance companies. This is followed by healthcare, at 16.8 percent, with banking and finance in third place at 11.8 percent.
“Regarding type, pure captives represent the majority of Vermont captives at 70.8 percent,” the report stated. Association, industrial insured and risk retention groups account for 21.4 percent, with sponsored and special purpose financial captives rounding out the remaining types of captives in Vermont.
Growing pains
Though Vermont has been enjoying continued success for the last three decades, the state has mostly focused on large captives due to the tax structure, with mid-market companies tending to fall by the wayside.
“Vermont has been especially active in domiciling employee benefit captives for larger US companies, which require a US domicile under Department of Labour requirements,” says the CEO of Capstone Associated Services, Stewart Feldman. “If one were to analyse the number of net new captives in Vermont, deducting out liquidations and otherwise inactive captives, there would be little growth.”
Stipulations that have hindered growth include the Internal Revenue Code, which historically provided two pronounced tax advantages to small insurance companies, including captive insurers, in order to provide them with additional financial resources to pay claims. The regulations, which are contained in sections 501(c)(15) and 831(b) of the code, were amended with the passing of the Pension Funding Act of 2004.
While US Congress did not abolish 501(c)(15) insurance companies outright, it instead created a $600,000 maximum limit for gross receipts of both the insurance company and other companies that are held by the same control group.
“Considering the mid-market captives under Internal Revenue Code Sections 831(b) and 501(c)(15), which Vermont has dissuaded from domiciling in the state because of the little tax revenue, Vermont is likely to be seeing little growth going forward,” says Feldman.
He marks the ‘1000 pound gorilla in the room’ as the US Dodd Frank Act’s Non-admitted Insurance and Re-insurance Reform Act of 2010 (NRRA), “which strongly pushes a captive to domicile in its home state, [when] that is where most of the ultimate risks are located.”
“Absent a clarification in the NRRA, because few companies are headquartered in Vermont, this new federal statute should lead to an erosion in the captive business prospects for Vermont,” added Feldman.
However, Provost disagrees, concluding: “We’re still growing. As a mature domicile, the number of captives is holding relatively steady, as new companies are formed, some older companies merge with others, some companies close up shop, some move out, and some move in. The companies that remain continue to grow, so premium volume has steadily increased.”
