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800 and counting What's driving Vermont's captive industry growth? By Michael J. Moody, MBA, ARM The captive insurance industry has enjoyed significant growth over the past 20 years, and nowhere is this more apparent in the United States than in the small state of Vermont. While Vermont was not the first state to allow captives, its regulations proved to be more user friendly and, as a result, its captive business has flourished over the subsequent years. Recently, Vermont set yet another milestone by licensing its 800th captive. There are many reasons for Vermont’s success as the largest U.S. captive domicile and second largest in the world, but one of the key reasons is the regulators in charge of this division. It all starts with Len Crouse, Deputy Commissioner of Captive Insurance; Derrick White, Director of Captive Insurance; and Peter Raymond, Director of Financial Examinations. These three individuals have been working together on behalf of Vermont for more than 15 years. This has produced a consistent approach to captive regulation that has benefited many of the captives that are located there. 2006 was a carbon copy of 2005, when Vermont licensed 37 new captives. Included in the Class of 2006 were such well-known companies as Starbucks Corp., McGraw-Hill, Principal Financial Group, Ameren and Aegon. Additionally, Vermont is the captive home of 42 of the Fortune 100 companies. They also have captives for 19 of the companies that make up the Dow 30 index. Economic impact Without question, the captive movement has been good for the Green Mountain State. Today, captives in Vermont have gross written premiums of more than $11 billion. This translates into significant benefits for all Vermonters. The most obvious benefit comes from the $22 million that flows to the state’s bottom line from the annual premium taxes collected from captives licensed in the state. Additionally, it is estimated that more than $1.2 billion is held in Vermont’s banks and other financial companies in connections with captives. Further, the captive industry provides jobs with virtually no environmental footprint. These jobs are consistent with Crouse’s “Affordability Agenda” as well as the state’s “Way Forward” program. Crouse notes that the economic impact from the captive industry for the year 2006 was significant. He says, “The captive industry created 1,429 direct and indirect jobs, including both full- and part-time positions.” And not just any jobs. The 2006 Economic Impact study shows the captive industry generates jobs with an average salary for full-time employees of $52,200. This is 63% higher than the average Vermont private, non-farm wage for the same time period. Addressing change Most state domiciles, including Vermont, have to revise their captive legislation from time to time, to keep up with the changes in the industry. This year Vermont passed S91, which makes the following changes in the state’s captive law: • Controlled Unaffiliated Business—allows an industrial insured captive to insure the controlled unaffiliated business of its industrial insured members. This is something that pure captives are currently allowed to do. • Association Captives—clarifies that an association captive insurance company can insure its sponsoring association in addition to the associations’ members and affiliates. However, the really big news regarding Vermont captives this past year has been the strong interest in securitizations. Crouse notes that these are “much different than the traditional captive market,” and that there is a steep learning curve associated with this business. Even so, Vermont has taken the time to understand this business, which Crouse says, “was necessary to retain our position within the captive industry.” For the most part, these programs have been directed at the redundant reserve issue that life insurance companies now face. Work on these types of captives typically involves Wall Street investment houses and can be classed as “high finance” transactions involving many billions of dollars. Crouse indicates that Vermont has successfully licensed five of these captives and has three or four still in the pipeline. Crouse says this may be the hottest area in the captive industry today. Noteworthy trends Vermont’s licensing of its 800th captive is noteworthy for several reasons. Just the fact that the state has licensed that many captives is quite an achievement in and of itself. But a little background on that 800th captive can provide some additional insight into Vermont’s business plan. The captive is actually a risk retention group (RRG) that was formed by one of New York state’s largest medical groups, Mount Kisco Medical Group. The Medical Group was formed in 1946 and today is one of the oldest multi-specialty doctor groups in New York. While some people may be surprised that this captive was created to write medical malpractice coverage, professional liability coverage for hospitals and doctors has been a growth area for Vermont since about 2002-2003, according to Crouse. Currently, Vermont has nearly 100 captives providing coverage for medical professional liability, and they accounted for about $1.6 billion in gross written premiums last year. And while Crouse observes that the medical malpractice market is softening just like most other lines of coverage, he thinks doctor and hospital groups will continue to be interested in coming to Vermont. Another area of interest, Crouse indicates, is “including employee benefits in captives.” While this topic still holds much interest and discussion within the captive industry, Course says, “It has not taken off like I would have thought it would have a couple of years ago. It is moving slowly, but it is still moving.” Vermont approved four employee benefit programs last year and Crouse says, “We still get some calls about this.” He says that there are several companies that are now working with the U.S. Department of Labor to complete that potion of the approval process, so he thinks additional captives will be involved with employee benefits by year-end. Crouse was the recipient of the 2007 Distinguished Service Award from the Captive Insurance Companies Association (CICA). The award was created in 2006 to recognize significant contributions to the captive industry. In making the award, CICA noted Crouse’s 30 years as an insurance regulator with responsibility for the administration and regulation of captive insurance companies and risk retention groups. CICA further pointed out that he has published a number of articles for various trade publications on the subject of captive insurance and is a highly regarded speaker at seminars and conferences nationwide. Crouse said that he was quite surprised by the award: “CICA is a worldwide organization and being recognized by them made it even more special.” He also notes that the award is a “reflection of how I have tried to set up the department here.” With regards to that, he says, “We are regulators, yes we are, but we are also promoters and business people.” At the end of the day, he says, “We are all working to promote the captive industry here.” While there is a softening of the general insurance market, the prospects for continued growth of captive insurance companies in Vermont appear to be good. Many mid-size companies are now beginning to see the value of alternative risk financing techniques such as captives, and they are moving forward with those plans. * The Author |
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