Weak regulators can give whole captive sector a bad reputation
The increasing number of captive domiciles in the US – with around 40 states now adopting some form of legislation – is good for the industry, giving prospective captive owners more choice and keeping the older domiciles such as Vermont, South Carolina and Hawaii on their toes.
This is according to Richard Smith, president of the Vermont Captive Insurance Association (VCIA), who spoke to Captive International ahead of VCIA’s annual conference, which is taking place in Burlington, Vermont, this week.
Smith encourages the increased competition among domiciles – especially some of the more recent emerging domiciles – but stressed the importance of having strong regulations to avoid giving the industry a bad reputation.
“We'd rather have well-regulated competitors versus states that don't really have strong regulations that could have a negative impact on the industry,” Smith said.
He suggests there are states that are trying to build their captive business but are doing so at risk of licensing captives that probably needed more time or shouldn’t have been licensed in the first place.
“We've had problems in other states where things don't go well, federal officials look at captives and they see that one bad article in the press and think the whole industry is nothing but a scam. And that really is a problem. We want to make sure that whoever's in the industry is doing it correctly; that's one of our big goals.”
Without a strong regulator, Smith warns that the domicile may attract captive owners or captives that really needed more time to ensure the captive is going to remain solvent or shouldn’t have been licensed in the first place.
In the last few year, Smith has seen more and more states adopt captive regulation that has ‘mirrored’ Vermont’s, which is often heralded as being the ‘gold standard of domiciles’.
“We still joke that they take our state captive legislation here in Vermont and insert their state name where it says Vermont,” he said. “And the reason we know that is because we have some typos in our legislation, and those typos end up in other states' laws.”
In response to some of the emerging domiciles introducing new legislation, Vermont is looking at what other states are doing and making sure it remains competitive, said Smith.
“We look at our captive statues every year and update them every year because we know the industry evolves very quickly,” he added.
But primarily, Smith said it was paramount for a domicile to have strong regulations and regulators that are willing to communicate and are willing to put resources into making sure decisions are made quickly and effectively.
He continued: “When I speak to captive service providers and captive owners, what's important for those folks when they're licensing a captive – no matter which domicile – is that they have strong lines of communications with the regulator, and that the regulator has the expertise and know-how both successfully regulate the captive in a way that protects what needs to be protected in terms of solvency, but can also provide that flexibility that captive provides their owners.”
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