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The view from Vermont

The state hits 25 years of captives

By Michael J. Moody, MBA, ARM

Captive insurance companies have become a staple in many organizations’ long-term risk management strategies. And while captives may once have been the exclusive domain of Fortune 500 companies, recent years have shown that this is no longer true. Now the mid-sized organizations are also profiting from their use. While 2005 saw a moderating in the pace of captive formations, growth worldwide in captives did continue.

Some individual domiciles actually experienced a reduction in the number of captives. However, the leading U.S. domicile, Vermont, continued to see good growth. According to Len Crouse, deputy commissioner, Captive Insurance Division of the Vermont Department of Banking, Insurance and Securities, the department issued 37 new captive licenses in 2005. While it is certainly less than the past two years, Crouse says, “It is manageable and about what we would expect in the future.” He goes on the say, “Thirty to 35 new captives is a good number for our state.”

Changing landscape

As noted earlier, captives are no longer just a risk-financing tool of the super large, multi-national corporations. While Crouse admits that growth in 2005 came from a cross section of company sizes, (including several large organizations (i.e., Chevron Corp., Pfizer, Inc., DuPont Chemical, Nestlé USA, Inc., and Sun Microsystems), he believes that the future growth will come from mid-cap and small-cap companies.

Vermont has a number of advantages over other domiciles, not the least of which is the quality and quantity of its infrastructure. This was further strengthened by the addition of several new captive management firms into the state during 2005. Among those setting up new operations in Vermont last year were Liberty Mutual Management, HSBC Insurance Management, Arthur J. Gallagher Captive Services and Wilmington Trust Corp. In addition, several other new service providers also opened new offices in Vermont during 2005.

While Vermont’s infrastructure is the envy of every other U.S. domicile, it’s their regulatory environment that frequently is the deciding factor in a domicile selection process. The state has a team of captive specialists that is headed up by Crouse, but it also includes 28 other full-time professionals, including two new examiners who came on board in June. The team has significant experience in the captive arena and enjoys an excellent relationship with captive owners and service providers alike. Over the years, Vermont has provided a stable regulatory environment and consistent view of the captive regulations. When changes in the regulations are required, the state legislators have been willing to change the laws to accommodate the captive industry. Last year, the captive laws were modified as follows:

• Captive Insurance/Association Captives—eliminates the requirement that an association must be in existence for one year before forming a captive

• Sponsored Captives-Choice of Corporate Form—allows sponsored captives the option to organize as a non-profit or a limited liability corporation

• Sponsored Captives-Qualifica-tions of Sponsors—expands the kinds of companies that are allowed to form sponsored captives to include financial institutions and registered broker-dealers in addition to insurance companies

Crouse’s team remains accessible to any prospective or existing captive owners. He has always taken a very flexible approach to captive formations and states that if there is a “good business reason” for the captive, it should be formed in Vermont. In addition to the normal captive regulator duties, you can usually find Crouse, or one of his team members, at many of the industry trade shows as well as the periodic road shows that the Vermont Captive Insurance Association puts on around the country. The accessibility and flexibility of the regulators has resulted in an environment that is referred to by many as “the gold standard.”

“Here in Vermont,” Crouse says, “we try to run our department to a high standard, and keep that standard at a certain level.” And he goes on to say, “We want to do a good job of regulating those captives that have chosen Vermont as a domicile.”

Just the facts

Dan Towle, Vermont’s director of financial services, notes that over the 25 years since Vermont became a captive domicile, there has been a changing landscape to Vermont’s captive business. The most recent has been the formation of medical malpractice captives that were established in response to the hard market in professional liability coverage for health care professionals and facilities. Towle says that currently, Vermont accounts for over $1.3 billion in med mal premium. Many health care providers have found it is no longer necessary to go offshore to do a med mal captive. Towle also notes the success that Risk Retention Groups (RRGs) have had in Vermont. Currently Vermont has 77 RRGs licensed in the state.

As noted earlier, Vermont had a total of 37 new captives during 2005. Of that number, 26 were pure captives (single parent) and five were RRGs. Additionally the state closed 2005 with three new sponsored captives, two association captives and one branch captive. The captives that are active in Vermont write an estimated $12 billion in gross written premium. Crouse says the most popular lines of coverage for the Green Mountain State captives are general liability, professional liability (particularly medical malpractice) and workers compensation. He notes, however, given the events of the past 12 months, property coverage will be another popular line considered for a captive. Some of the larger captives are exploring how their captives can help with their property programs. Many are looking at high-layer catastrophic type coverage. While flood and wind are receiving the majority of attention, Crouse points out that earthquake activity has also increased over the past few years and may also end up in captives.

According to Crouse, interest in TRIA has slowed significantly this year. Subsequent to the passage of a new TRIA backstop plan, no monoline TRIA captives have been started in Vermont. He points out, however, that several existing captives did add TRIA coverage to their captives. Long term, Crouse believes that the addition of employee benefits to a captive will result in significant opportunities for many captive owners. He also thinks that the movement to a chief risk officer will hasten the inclusion of employee benefits in captives.

Eye on the future

Crouse notes that 30 states currently have captive legislation and could potentially provide Vermont with competition for new captive formations. “Most of those states have modeled their captive laws after Vermont’s statutes,” he observes. Further, he says, “We have found out that it takes more than just a captive law to make a captive domicile. It’s the people, the infrastructure, the regulators, and the legislators.”

As a result, Crouse is not too concerned with potential competitors. “My attitude is good luck to them all, but if they are going to get into this, just do it right.”

Looking down the road, Crouse sees continued growth of the captive insurance movement. “The alternative market is now the insurance market, and it has grown bigger than the traditional insurance market.” He thinks that it will continue to grow, despite market conditions. He also believes that captives are gaining wider acceptance each year, as the market matures.

“It’s no surprise that when captive owners think of innovation, stability, and predictability, they think of Vermont,” Towle adds. He goes on to say, “We have provided that for 25 years and because of that, Vermont will see solid captive growth in the future.” Additionally, Towle points out, “A lot of people have ownership in our success, and that is one of the reasons it has been so successful.”

In many ways, it is difficult to believe that Vermont is celebrating 25 years as a captive domicile. By anyone’s standards, it has been a successful 25-year relationship. Early on, Vermont recognized that captives held a significant potential for the state. Today, “Captive insurance is a big business for our small state,” says Towle. In fact, when taken in total, the captive industry is a top 10 employer in Vermont. All of the parties involved with the captive industry in Vermont have been working together on a common goal; and as Towle points out, “It is truly a wonderful partnership.” And not one that is likely to go away anytime soon.

Twenty-five years of service in any industry is a major achievement. And 25 years of service to the advancement of the alternative risk transfer market is exceptionally noteworthy. Congratulations to all of those people in the Vermont captive insurance industry on this historic achievement and good luck in the next 25 years. *

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