David Provost’s hot topics panel at the VCIA conference earlier in August considered why captives may redomesticate, and why RRGs need to built from the core up
Every year at the Vermont Captive Insurance Association Conference (VCIA), industry expert Dave Provost, deputy commissioner of captive insurance at the Vermont Department of Financial Regulation, leads a must-attend session on current hot industry topics. Also involved in this year’s panel were Dan Towle, director of financial services for the State of Vermont, Sandy Bigglestone, director of captive insurance for the Vermont Department of Financial Regulation, and this year Derrick White, president of Strategic Risk Solutions in Vermont.
Following on from a successful 2015, Vermont “is doing great” so far this year, Provost said, with 11 captives licensed and more in the pipeline. He added that many captives tend to be formed at year’s end to get them on the books.
Redomestications
Last year, 11 out of the 33 captives licensed in Vermont were redomestications, a record number for the state. Towle said: “I look at redomestications as a barometer of how we are competing in the marketplace because existing captive owners are the most savvy when it comes to doing their due diligence on domiciles. They are not newbies, they know how to do their homework.”
He added that even though the soft market persists, “we have a full third of our captives coming from other domiciles”.
The 2015 redomestications included three from South Carolina, three from Arizona, two from Bermuda, one from the Cayman Islands, one from Nevada and one from Kentucky. Towle revealed that the reasons for moving are individual to the captive, but one example he gave was examination cost.
Towle noted that Vermont has not seen any redomestications so far this year, but there have been many conversations on the subject. Vermont sees, on average, five redomestications each year, explained Towle. In Vermont’s 35 years as a captive domicile, the state has seen a total of 65 redomestications.
Vermont is also not immune to redomestications, according to Bigglestone. In 2015, the state lost captives to Arizona, Nevis and Texas. She noted that the Texas redomestication did leave because of self-procurement taxes.
Self-procurement taxes are state-imposed premium taxes of up to 4 percent on premiums paid to most captives. As the tax is imposed by individual states, captives may have the opportunity to domicile shop to avoid liability.
According to Towle, unsurprisingly, self-procurement taxes do come up in conversations with both current and potential owners, whose choice in the matter of where they domicile is important. If every domicile imposed the tax, it would become very expensive for captives to operate in the US.
White said that in-house counsel often bring up the topic of self-procurement tax and always recommend it as something for the company to think about.“Whenever we form a new captive, self-procurement tax is a factor, but not a major one, when choosing a domicile. That said, we still bring a ton of them to Vermont.”
Bigglestone added: “I was having a conversation recently in which the parent company asked another risk manager, why are we in Vermont? I think it is important for companies to review that and ask those questions, but then review Vermont as well.”
“Ultimately, they said they had put all their trust in Vermont and they benefitted from being here, along with their service providers. They had no desire to leave and it was a win-win situation.”
Risk retention groups
The majority of captives in Vermont are pure captives, but the state also has a healthy helping of risk retention groups (RRGs). VCIA president Richard Smith recently revealed that Vermont continues to hold a dominant market share, with more than 60 percent of all RRG premium volume written by Vermont companies.
White said: “The number of RRGs right now is down to 235, which is the slowest it has been in five or six years. The highest it has been is around 264 and this is the longest soft market [we’ve experienced for some time].”
Towle added that it is difficult to put risk retention groups together during a soft market.
He said: “From our perspective, the companies that form during the soft market are doing it for all the right reasons. Captives are long-term risk management solutions, we don’t want them just to be an immediate reaction. So when companies get a group together and buy into it, it has to be something they’re going to be in for the long haul as the market goes up and down. Those are some of the most successful programmes.”
Forming a risk retention group with a core membership is a trend that Vermont “really likes to see”, Provost added. He said: “If you come to us with a core group of members and that core will give you a thriving and surviving RRG, well then any growth on top of that is going to be a bonus. We see an RRG as a core group that are dedicated to that purpose, to risk management and have that need.”
