1 September 2022ArticleAnalysis

Passing the baton

What were the biggest decisions you’ve made in your time in office?

DAVID PROVOST: There are three key decisions. First is hiring—you have to get the right people in the right job. I have to give a lot of credit to Sandy and Dan Petterson for their excellent hiring decisions.Everyone on our staff is qualified and interested in doing the work and enjoying the job, so that’s the first thing—get the right people in there and then the rest is almost easy.Second is deciding whether to give a licence. It’s fairly straightforward for us to say: “That appears to fit in Vermont, so apply and we’ll work with you to make sure that it works going forward”. On the other hand, saying no takes a lot of work and a good deal of hand-wringing.Third is the toughest decisions—when companies are in trouble, when you get to the point of deciding whether to shut a company down. We work with companies when they get into difficulty to turn them around—or to help turn themselves around. We help them to come up with a company plan that we can approve rather than a regulatory action plan that we have to impose.They either turn around or they don’t—and on occasion, we’ve had to take companies over and liquidate them. That’s the hard part: when do you make that final choice? We liken it to firefighters—you hope there’s never a fire, but you have to be prepared and if there is then you have to do something.

What has made Vermont so special in terms of captive insurance growth?

PROVOST: It’s our continued focus on doing the right things. It’s our mantra. Our mission statement clearly states that we license captives for risk financing and risk management needs and everything else falls after that. Captives should not be formed solely for tax purposes and if they are that is a big red flag for us. We don’t really care what your tax election is, we expect you to follow the tax code and make the appropriate tax choices that are going to give you the right tax result—but that shouldn’t drive the captive.We continually focus on quality, gold standard regulation of talking with companies, understanding what they do before we license them and understanding what they do throughout their life span. We regulate to the business plan and the solvency of the companies.We still do much of the same work, but how we do it has changed. We’ve gone to electronic paperwork, which is helpful. It makes it easier to share information especially since we changed to working remotely. We went remote before the COVID-19 pandemic—it is a lot easier to get the information around. We regulate and examine and apply surveillance with a more prospective view in mind. We’re required to follow the National Association of Insurance Commissioners’ (NAIC) processes for certain exams and take the best of what they have to offer for other exams.It’s no longer just checking the box on how you’re doing and how did you look last year, it’s more “you looked fine last year, how are you looking for the future, are you doing the right things to prepare yourself for the future and are you monitoring your prospective risks? Are you looking at all the things that that can happen to you to give you a better chance of surviving and thriving in the future?”.Our whole exam approach is more future-focused than historic and that’s a pretty key difference.

Why did Vermont go online so early?

PROVOST: Our exam staff were always classified as home-based employees. They worked in the office only rarely, they usually were in other people’s offices doing the work there and spending very little time, except for quarterly reporting periods, in our own offices, so they were used to working remotely. When Commissioner Kimbell was appointed in 2010, he needed space for some new staff and he looked at our division and said: “The record says you’re home-based, go home” and used our office space for other parts of the department.We therefore had several years of practice working primarily remotely and just before COVID-19 hit we did some system changes that allowed our staff to have full access to everything in the department’s files and systems so they truly could be home-based.So when the pandemic hit, we were already used to dealing with file transfers and talking remotely and doing everything without actually being in person. Although we did some in-person working and loved it—we get to travel across the country and even to other countries to do exam work and testing of underwriting and claims files—it was all work that could effectively be done remotely.

How much has changed over the past 15 years?

PROVOST: I don’t think we made any drastic changes in the past 15 years. To me it feels like it’s been a gradual, smooth change of people coming, people going, but we still focus on doing our jobs.We’ve all enjoyed doing our jobs. It’s neat work to talk with companies and understand what they do. Talking to the parent companies and learning what they do and the problems they faced and how captives have helped them solve some problems has been the highlight.That’s been fun from the first day to the last. We’ve had several in-person meetings in the last month or so with companies, talking about the results of their captive and showing how much money they’ve saved by creating a captive. That tradition started with former deputy commissioner Len Crouse, and I can’t imagine any reason not to keep it going.

Sandy, what’s first on your list of priorities as you replace David?

SANDY BIGGLESTONE: I’ve been asking myself the same question over the past several weeks and I do have some ideas. In our typical fashion, any changes will be intentionally thought out and vetted with industry, so I expect any change to be gradual. The captive insurance industry and regulation have evolved over the past several years, so I plan to look at possible improvements on our processes and procedures, how we do things, and the laws in effect.I plan to focus on modernising, or at least go through the exercise of exploring ways in which we can continue to be a top choice among domiciles.As regulators, even if we are doing our job to the best of our ability, it’s still worth our while to explore improvements and efficiencies.I plan to remain open to ideas coming from industry, to meet with folks and address the needs of the captives marketplace. The captive insurance industry itself is known for being innovative, so when the marketplace needs change, we will always look to shift in some fashion to accommodate new solutions, if changes make good business sense and align with our standards.I don’t intend to change the Vermont standard. Our mission has served Vermont well for over 40 years, which entails high standards for bringing companies to Vermont and focusing on quality programmes.I plan to add more professionals to our staff, which is a major priority. I intend to continue to encourage training and a focus on conducting value-added work with respect to companies we regulate. I want to be intentional about building on our strengths, which are the people we employ, and another reason Vermont is a leader in the captive insurance regulatory space.

The baton is being passed but standards of quality and key staff will remain?

BIGGLESTONE: That message is all-important to convey. Another important priority is to be an intentional and thoughtful leader and continue to have active participation in organisations such as the NAIC and the Society of Financial Examiners, and industry events focusing on spreading good quality education. Our work and being a leader in the industry can’t be recognised if we’re not out there talking about it.

Are there any areas you’re keeping an eye on?

BIGGLESTONE: Cyber is an area we are seeing growth in. Captives with existing programmes are adding cyber and there are captives forming specifically for cyber coverage. Cyber has evolved over the years, but there are still gaps in the commercial marketplace which captives can help solve.Around 10 or 15 years ago cyber was an emerging risk, and captives provided a convenient solution for setting aside funds in case of a cyber event or breach in security. Since then, some high-profile cases created the need for cyber to be addressed as a catastrophic type of exposure for many organisations, such as major retailers, banks, and healthcare organisations.When considering cyber exposure, the losses that could occur and how losses are triggered, it needs a special focus. We evaluate how a company or organisation is mitigating the risks and preventing losses from occurring in the first place. We also focus on any resources available to an organisation should they need to recover from cyber events.If cyber losses are greater than expected then it may have a material impact on the captive’s equity, especially if other lines of business are covered by the captive. Therefore, a focus on other available resources may be necessary.

“I want to emphasise my focus on attracting and retaining qualified staff.”

Sandy Bigglestone, Vermont Captive Insurance Division

With respect to other types of coverage we are seeing organisations needing to manage employee benefit programmes, so there is some activity with respect to employee benefits and medical stop-loss.The captive insurance industry is growing, not just in Vermont but everywhere. Certainly, the commercial marketplace is contributing to the growth in alternative solutions, and will likely continue, at least in the foreseeable future. While growth is positive, it can present challenges. The industry needs to have the right amount of qualified people participating in the work, and in government, regulators need to be able to handle and monitor the impacts of growth.I want to emphasise my focus on attracting and retaining qualified staff, people who understand the value in the work we do and how it serves an important role in modelling good captive regulation.