Dan Towle, director of financial services in Vermont, described the state’s 2015 as strong so far during a panel discussion at the Vermont Captive Insurance Association (VCIA) Annual Conference.
Dan Towle, director of financial services in Vermont, described the state’s 2015 as strong so far during a panel discussion at the Vermont Captive Insurance Association (VCIA) Annual Conference.
He revealed that 14 new captives have been licensed, with three in healthcare and the rest in professional services, insurance, construction, education, manufacturing, real estate, not-for-profit, transportation and retail.
Of the 14 licensed, 11 have come from different captive managers. There have also been five redomestications.
On the same panel, David Provost, deputy commissioner of captive insurance at the Department of Financial Regulation, discussed the current hot topics in captive insurance.
Provost began by discussing healthcare stop-loss insurance.
He explained that it has been very active for several years, with new captives being formed for this purpose, or existing captives adding these lines.
Healthcare stop-loss has been a big line of insurance for pure captives and groups, according to Provost.
He added that his department has had to regulate them carefully. Provost said: “We have to work at it carefully because what we have seen is a different line of business compared with what most captives used to do, as money starts going out before it starts coming in.”
Provost explained that other captives pay premiums for a few years before shelling out for losses, but for healthcare, losses have to be covered almost immediately.
Employee benefits is another hot topic, according to Provost, because more and more employers are adding it to their existing captives.
He expects the US Department of Labor to begin speeding up the approval process for importing these plans to captives.
Another popular topic was cyber risk. “In Vermont, we have had one captive join just for cyber purposes and a lot of other captives have added cyber to their programmes,” said Provost.
He added that many captives have included cyber risk in their general liability lines rather than adopt separately.
Captive industry regular the 831(b) tax election also came up during Provost’s talk, with many outside of the business criticising its use. Small insurance companies can elect 831(b) for taxes on their investment income if they write less than $1.2 million in premium. Vermont has approximately 30 captives that make the 831(b) election.
Provost explained that Vermont’s position on the election is unchanged and stated: “We have always licensed captive insurance companies and we expect them to take full advantage of the tax code that suits them. It is not something that is a regulatory concern to us, but it is something that worries the captive industry.”
There are changes being proposed to the 831(b) election, according to Provost, which could see the maximum premium being increased from $1.2 million to $2.2 million.
The Risk Retention Act is also still being considered for amendments, with risk retention groups (RRGs) wanting to be able to add property commercial coverage as a line of business. Provost said that the amendment has been narrowed down to RRGs that have been in existence for 10 years, have $5 million in capital, and are insuring certain entities that qualify.
There is still opposition to reforming the act despite the amendment being narrowed, although Provost hopes that it will still go through Congress.
Finally, Provost focused on the National Association of Insurance Commissioners (NAIC) and principal-based reserving for insurance companies. He explained that the new approach to determining policy reserves will become effective in 2017 and believes it will solve the ‘captive problem’ from an NAIC point of view.
Provost then moved on to the NAIC’s accreditation programme and changes that could capture certain captive insurers and special purpose vehicles.
He commented: “It has been reworded to become much more acceptable than what it was. I hope it is specific on what type of captives are subject to accreditation, so only life insurance captives owned by life insurance companies to reinsure XXX and AXXX lines of business. And that if we comply with the new actuarial guideline before the deadline, then we are safe for accreditation.”
He believes there are still open items with the application of accreditation and expects it to cover the insurance of long-term annuities or long-term care.
Technology
A hot topic throughout the conference was technology in the industry and the influence it could have over future trends in captive formations.
A panel discussed how technology could influence captive formations in the future, giving examples of how it could assist with day-to-day risk.
Mary Ellen Moriarty, vice president of property and casualty at Educational & Institutional Insurance Administrators, believes that technology has helped the formation business.
“If you go back in time, the whole data cycle was a gigantic investment of time and I think you have got to give yourself a good year to form a captive, but I think the transactional bits, getting the data back and fourth, is much easier.”
She continued: “When it comes to a response in business plan changes and you want to add a line of coverage to your captive, you need to go to the regulators for approval. In 2002 it took weeks; now it really only takes a day or two. It really has become much more efficient than what it was 15 years ago.”
Sandra Bigglestone, director of captive insurance at the Vermont Department of Financial Regulation, added that regulation needs to be as innovative as technology, both in terms of the law and adapting what captives need to be able to do, and the regulator it mandates, so that the regulator can move at the speed of business.
Anne Marie Towle, vice president of the North America captive consulting practice at Willis, spoke about how technology can influence the future of captive formations.
She gave the example of a contractor company overseeing a job: an app would let the contractor check on sub-contractors and track when they arrive at a job, how long they take, and when they check out.
When it comes to captives, the tracking ability would allow data to be gathered for workers’ compensation coverage, she explained.
She believes with that data, immediate reporting and having the captive respond, it can assist with day-to-day risks, which would help to mitigate claims.
The same panel also discussed the importance of maintaining a captive and the best practices for doing so, with discipline being highlighted as the key.
Moriarty believes that captives fail because they get excited about the development of surplus and try to find ways to reduce premiums, or a way to return money to members.
She continued, saying that the key to maintaining captives is to be disciplined and price risk for what it is.
Leslie Ratley-Beach of the Land Trust Alliance, which oversees the Terrafirma Risk Retention Group in Vermont, said that for Terrafirma, members of the committee have an interest in ensuring the dual goal of keeping captives relevant and financially solvent for members, while maintaining stability.
Towle believes that a focus on, and analysis of, growth, to look at key drivers and how to interpret them, is equally important as companies continue to evolve and consider making potential changes to their captives.
She added that some tend to rely on their captive managers because “the captive manager acts like the quarterback” in discussions with everyone from the regulator to the advisory committee.
“Talk with your insurance consultant, and make sure everything is operating smoothly, according to the business plan and regulators.”
