New faces, new legislation support agency and broker role in captive market
As attendees gather for this year’s Vermont Captive Insurance Association’s (VCIA) annual captive conference, which is expected to attract north of 1,100 professionals to Burlington, one person will be missing from the Vermont contingent. Dan Towle, who for more than 17 years was a nationally recognized leader in captive insurance and has been credited as a key figure in advancing the captive insurance industry in Vermont and beyond, stepped down from his role as Vermont’s director of financial services in April and took over the reins of the Captive Insurance Companies Association (CICA).
Succeeding Towle as director of financial services is Ian Davis, who previously served as policy specialist for the Vermont Agency of Commerce & Community Development. Prior to that he held a post as policy fellow under the Secretary of Commerce. Carrying an unofficial (but, perhaps, more accurate) title of chief marketing officer for the Vermont captive industry, the 30-year-old Davis is no stranger to the business; he’s the son of Lisa Ventriss, VCIA president from 1997 to 2002.
According to Davis, the timing for the transition could not have been better. The Agency of Commerce & Community Development’s Department of Economic Development, which is responsible for captive business promotion, has been looking to add personnel to the financial department. “I actually took a position with the department about six months prior to Towle’s announcement,” Davis says. The overlap let the two spend time together and let Davis become familiar with the department and role.
Davis moves into his new position following a strong year of captive growth last year. Vermont licensed 26 new captive insurance companies in 2016, including 15 pure captives, five risk retention groups (RRGs), three special purpose financial insurers, one sponsored captive, one industrial insured captive, and one association captive. Eight companies in the healthcare sector formed new Vermont captives in 2016 and two captives were redomesticated—one each from the Cayman Islands and Washington, D.C.
Agency captives and more
The annual VCIA conference is, of course, a key element of Vermont captive promotion. While a full slate of sessions is scheduled for the event, themed “Mission: Possible,” several specific meetings based on new Vermont legislation signed into law by Governor Scott in May 2017 promise to be particularly popular.
There are several primary features of the new legislation, but, according to Richard Smith, VCIA president, “The first and most popular is the agency captive section.” The law added agency captives to the types of captives that can be formed in Vermont. An agency captive is a reinsurance company controlled by an insurance agency or brokerage. Through a reinsurance agreement with a traditional insurer, the agency captive receives a share of the premiums written and is obligated to pay its share of claims.
The use of an agency captive creates a long-term relationship between the agency and the insured where interests around risk appetite, selection, pricing, loss control, and claims management are aligned. According to Smith, “The agency captive is another way to help the agent/broker see the broader approaches available to their clients.”
He adds, “With the implementation of an agency captive, an agent or broker has yet another tool to assist in developing the captive owner’s strategic risk management plan.” He stresses the importance of transparency in agency captive creation. “It must be the right structure,” Smith says, “and it must include complete disclosure.”
Smith believes the ability to use agency captives “should be good for Vermont, as well as for agents and brokers. We have already had a number of folks express interest in agency captives.” He points out that the target market for agency captives is mid-sized brokers. Typically, he notes, smaller brokers lack funds to launch an agency captive, and “large brokers usually already have one or more captives.”
The passage of recent legislation is yet further evidence of how well the regulator functions in Vermont, says Sandy Bigglestone, director of captive insurance in the Vermont Department of Financial Regulation. “We all work towards keeping Vermont in a leadership position,” she says. To do this, “we need a pretty deep bench and a team approach. We try to maintain a staff of interchangeable individuals so that people can step in and not miss a beat.
“Despite the soft market,” Bigglestone says, “interest in captives, in general remains high.” She believes that there are a number of reasons for this interest. “If one of the primary reasons for forming the captive originally was gaining access to reinsurance, there is not a better time. With the regulatory environment tightening internationally as well as at the federal and state levels, captives are finding ways to benefit from the current climate. Captives being formed today are usually doing so for the long haul.”
Bigglestone also notes that, should the market harden, captives will be in the center of the solution. A hard market is not in the cards short term, but A.M. Best’s latest “First Look” report shows some interesting results. It notes that, after adjustment for loss reserve development, the accident year combined ratio, which rose 2.1 points to 104.0, is the worst in the past five years. Incurred losses are proving to be a struggle for the P-C industry. Don’t look for any major movement this year; however, results like these could spur further growth of the captive market.
According to Bigglestone, the soft market has persisted well past its natural low point. However, she notes that there are still opportunities for middle market agents and brokers. Potential captive owners—clients of agencies and brokers—are finding ways to obtain benefits outside the current market. While the traditional market may offer cheaper coverage in some cases, mid-sized accounts are using captive formation for specialized coverages, difficult exposures, or emerging risks.
For many clients, this may well be the ideal time for mid-sized agents/brokers to consider the alternative risk-financing market, especially captives. As Bigglestone points out, fronting and reinsurance are quite competitively priced and readily available. Vermont’s new regulatory addition of an agency captive also can provide an excellent opportunity to increase the agency’s involvement in the captive market.
Finally, Vermont’s focus on middle market firms can provide a unique opportunity for those agencies wishing to expand into the alternative risk-financing arena. Agency captives, if done correctly, can assist the agent/broker with retaining quality business. If your agency has any interest in moving into the alternative risk financing market, attending the VCIA conference can provide some excellent educational opportunities.
By Michael J. Moody, MBA, ARM