Tucked up in the American northeast, between New Hampshire, New York and Canada
Vermont is by no means a large state. But tucked up in the American northeast, between New Hampshire, New York and Canada, the second smallest US state by population and sixth smallest by area is a behemoth of the captive insurance industry.
The largest US captive domicile, totalling some 556 active captives and $22.1 billion in gross written premium, and the world’s largest captive insurance trade association, the Vermont Captive Insurance Association (VCIA), played host to the VCIA 2018 Annual Conference between the 6 and 8 of August.
This year’s conference saw 1060 attendees descend on the Doubletree Hotel in Burlington, illustrating the growth in the industry as a whole since the inaugural conference in 1985, when there were less than a dozen attendees.
VCIA president Rich Smith suggested that the 2018 theme, ‘where the captive world comes to meet’ highlighted the “tremendous opportunities” available at the event to “learn and collaborate with with the best and brightest in our industry”.
The state markets itself as ‘the gold standard’ and this is a position it appears the association does not take for granted.
Smith assured attendees that as the captive organisation with the largest day-to-day representation in Washington, “the VCIA will continue to work hard to ensure that captives are treated fairly”.
Smith added that their success in such endeavours is due to their active and expert members.
”Membership to VCIA keeps the whole industry strong and through that strength we can keep up the fight. Our strength is through you.”
Vermont congressman Peter Welch was full of praise for the captive industry, emphasising that this collaboration was one of its great successes, and suggesting that it is a reminder of how others should be operating, particularly in Washington.
“It shows problems are not unsolvable,” said Welsh, “what you have managed to do as an industry and the way you have focussed on managing the challenges that you face. Maintaining your focus on client needs, but understanding that it is not your way or the highway and working together with flexible legislative and regulators.”
Amongst what is, following a number of state and federal tax cases and in a soft market, a tricky time for captives, the Vermont conference reminded the industry of its strength and importance and emphasised the ways in which it can continue to grow.
Innovation
Like the VCIA conference, Fox cartoon the Simpsons began in the late 1980s. Reflecting this brotherhood was Joel Cohen, one of the show’s writers and producers, who spoke at the conference’s closing keynote. Cohen spoke at length about the show’s success, much of which was based on its positive environment and culture of innovation. Innovation was at the heart of the event’s first keynote speech, as renowned global futurist Jack Uldrich discussed the importance of being prepared for the trends transforming tomorrow. He outlined the ‘AHA’ strategy–having the ‘awareness’ of how much is happening and changing, having the ‘humility’ to accept that what has been successful in the past may not be so in the future, and taking ‘action’ when necessary.
Much of the discussion at the VCIA Conference was related to ensuring the industry was aware of how innovation that may impact the captive space, and focused on the opportunities thatchanges in technology and business would bring, and the action that companies may need to take.
Autonomous vehicles represent an example of an emerging technology that has the potential to have a monumental impact, and Peter Tomopoulos, senior manager of Deloitte Consulting’s actuarial, rewards and analytics, suggested that there is an opportunity for captive insurers in the autonomous vehicle space.
Speaking in the ‘the cognitive captive: artificial intelligence for smarter insurance’ session, Tomopoulos predicted that many of the needs of autonomous vehicle industry could be met by captives.
He explained: “Captives have a number of benefits that can apply to this emerging technology. Captives cover specialised risks that are difficult to underwrite that sounds a lot like what is going to happen, particularly early on, with autonomous vehicles. They can also lower insurance costs and reduce the risk of their parent’s balance sheet, as well as filling coverage gaps.”
He concluded: “All these new risks will create opportunities for captives.”
As seems the norm in 2018, blockchain was a subject of much discussion. The speakers at the ‘blockchain and distributed ledger technology’ session did an excellent job of breaking down blockchain and debunking some common myths.
One of the session speakers, Carol Barton, president of AIG, suggested it will build on the trust upon which the insurance industry is built.
She said: “As we think about captives, fronting and multinational programmes there is a lot of potential there for blockchain.”
“Insurance is an industry that is based on trust, and blockchain is a way to build on that trust.”
Barton referred to the first multinational programme delivered via blockchain, between AIG, IBM and Standard Chartered, as a case study.
According to Barton, the case study showed that blockchain had helped with operational simplification, regulatory efficiency, and liquidity and capital. In addition, it had helped reduce counterparty risk, clearing and settlement time and had minimised fraud.
Barton concluded: “I think right now and in the next three to five years as we move into a blockchain digitally-enabled environment the strategic opportunity is about operational efficiency.”
Renewable energy is another emerging market that may impact captives, and principal and consulting actuary at Pinnacle Actuarial Resources Robert Walling said there is a “tremendous opportunity” for captives in that space.
Speaking in the ‘innovative spotlight: financing unique risk’ session, Walling said he had been in conversation with multiple renewable energy programmes that week.
He explained: “One of my players of the week has been energy and I have been on calls with three different renewable energy programmes this week.”
“Three completely different programmes with three completely different solutions all facing similar challenges.”
“When you’re putting solar panels on a hospital, putting them in a residential neighbourhood and creating an energy cooperative, and when you’re setting up a power plant that supplements a local facility, the traditional insurance industry doesn’t cope well with that. There are lots of different types of warranty programmes, construction defect programmes and financial products that have stepped into renewable energy.”
“Whether it is biodiesel or ethanol, solar or wind, there is a tremendous opportunity for the captive industry to step in and help those programmes succeed.”
Upkeeping the ‘Gold Standard’
Understandably, Vermont took centre stage for much of the conference in what has been a “good year” for the the ‘gold standard’ domicile, according to deputy commissioner of the state’s Captive Insurance Division, David Provost.
The state has licensed 12 new captive insurance companies this year and has more applications in process.
Of the new captives licensed, nine were pure captives, two were risk retention groups (RRGs), one was a group captive and one was a sponsored entity.
Provost said: “We are having a good year, we have licensed a dozen captives already which normally at this time of year means more are on the way. There are opportunities in the captive market across the board right now. We aren’t focused on one area.”
This year has been relatively quiet in terms of legislative changes in Vermont, with the largest change being the new affiliated reinsurance company (arc) legislation which was signed into law in May.
The legislation provides an opportunity for companies affected by the recent imposition of the Base Erosion Anti-Abuse Tax on reinsurance ceded to offshore affiliates with an onshore alternative. No arcs have yet been formed, but Smith explained that the strength of Vermont’s regulators may help formations grow.
He said: “The fact that is the captive division that will be regulating them could be huge because people know the regulator in Vermont can do the job.”
“They take on these exogenous type of insurance vehicles and are able to regulate them and regulate them well.”
The Grassroots generation
Another topic which dominated discussion in Burlington was the next generation of captive insurance professionals.
The industry talent crisis was a talking point, with statistics in a conference session suggesting that nearly 400,000 people are expected to retire from the insurance workforce in the next three to five years and approximately 25 percent of the current workforce by the end of 2018.
Speaking at VCIA Anne Marie Towle, captive practice leader at JLT Insurance Management, said that the industry needs to be more active in inspiring the next generation of insurance professionals and said work needed to be done at the “grassroots level”.
She said: “Insurance is not something that you hear about much at high schools, more conversation needs happen at this level.”
“All of us in the industry need to be more active and help educate at the grassroots level by speaking at high schools.”
Another of the panellists, Colin Donovan, president of the risk retention group STICO Mutual Insurance, suggested that attracting more young people to the industry also needed to be done at a college level.
Donovan said: “The path for young professionals has to be there at the college level. If there is no risk management programmes then you’re going to have to find people that accidentally fall into insurance jobs, there has to be a programme if there is going to be a true path laid out.”
The VCIA has recognised the importance of exposing students to captive insurance and is looking to expand the number of risk management students that attend the conference over the next few years.
The conference’s emphasis on the importance of young captive professionals was highlighted by the professional development sessions provided, including unique sessions such as ‘presenting to boards and management’.
At this year’s conference, Strategic Risk Solutions (SRS) sent a number of students from across the country to the conference, allowing them to attend educational sessions and network with members of the industry.
Smith explained that he hoped to help more companies to follow suit in the future.
He said: “SRS brought five or six students from risk management programmes from across the country to the conference this year and that is something we are looking to expand over the next few years.”
“We are hoping to get other captive managers involved in hosting students at future conferences.We are hoping that these young people will be ambassadors for the industry and go back to their programmes to make more people aware of the captive industry.”
Sandi Prescott, head of client service at Performa, said that developing young captive professionals was an important area of focus for the conference.
Prescott commented: “Getting younger people involved in the industry and being able to provide the educational sessions is important to us.”
