Leading the field

The US state of Vermont remains the leading domicile in the US for captive insurance companies, far ahead of rivals like Utah and South Carolina, its closest competitors.

Vermont licensed 16 new captives in 2014, according to data released by the Vermont Captive Insurance Division, taking the total number of captives domiciled in the state to 1,040 licences covering 584 active captives managing some $25.5 billion in gross written premium at year-end 2014.

In contrast, Utah hosts around 400 captives and South Carolina some 230.

Vermont has a long history of being a captive-friendly state. It was one of three in the US, including Colorado and Tennessee, which led the way in passing legislation designed to attract captive insurance companies in the 1970s. However, while Colorado and Tennessee have developed more slowly in terms of developing their presence in this market, Vermont has never looked back and continues to storm ahead.

The new captives formed in the state last year comprised 10 pure captives, two sponsored, two special purpose financial insurers, one association and one risk retention group. Two new captives were also redomesticated, from Bermuda and Delaware.

Growth in 2014 was down compared with previous years, the fall attributed primarily to the prolonged soft market and added competition from other US states.

A refreshing approach

This has been a blip, however. Vermont has prospered in the captive market in recent years while other US states have not, something that Dan Towle, director of financial services of the State of Vermont, attributes to the state’s willingness to constantly reinvigorate its legislation and appeal.

“Vermont was the first to give the business and regulation of captive insurance a fresh look and because of our success we have kept that same model going forward,” Towle says. “We are always trying to find new ways to do what we do better. That has been an important part of why we have been successful for more than three decades.”

Dave Provost, the deputy commissioner of captive insurance, adds: “I think that Vermont’s size [it is the sixth smallest state in the Union] was—and still is—an advantage. A few jobs makes a difference in our small economy, and those few have grown to a few hundred.

“That might not get noticed in many of the larger states, but it has a disproportionate impact in Vermont.”

Towle also stresses that Vermont has always nurtured the quality of its offering; it has never chased growth at the expense of seeking quality businesses.

“Vermont has always sought quality companies that want to be regulated in a manner consistent with their risk profile” he says. “We have never wavered from that model. We do not chase numbers simply for the sake of growth.

“If there are 50 quality companies that come before us, we want to license them all. If there are no quality companies, we are not going to chase companies that don’t fit our profile. Because of this discipline, we have built a global reputation as the gold standard.

“For more than three decades we have offered consistency, stability, experience and innovation all without any surprises. That has been the cornerstone to our success.”

Of course, building such success is one thing—defending such a lead in the market is something else. Towle points out that captive insurance is a big business for a small state such as Vermont and that very few jurisdictions can say the same. As a result, Vermont has the ability to change its laws and react quickly to the ever-changing insurance marketplace.

In addition, Towle claims that Vermont has never rested on its laurels and that the state is always trying ways to improve what it does. “Our governors and legislatures have always supported us and given us the resources needed to be successful,” he says.

Defending the reputation

Defending this lead comes as the industry copes with a number of threats to the captive market in general. One specific challenge came at the start of 2015, when the Internal Revenue Service (IRS) listed the abuse of captive insurers for tax purposes in its ‘Dirty Dozen’ list of 2015 tax scams. What advice does Vermont provide to make sure that companies can avoid being linked to this?

Towle explains exactly what the IRS was looking at in some detail.

“Let’s be clear,” he says, “the IRS did not list captive insurance on the 2015 Dirty Dozen, they listed 831(b) captives on the list. 831(b) captives are not a core market for Vermont and make up a very small percentage of what we license. If Vermont was a domicile that primarily licensed 831(b)s I would be concerned.

“What I am concerned about is the reputational risk that these small captives may bring to our industry. In Vermont we license captive insurance companies for risk management reasons and any domicile that is doing anything but that does bring a risk to the industry as a whole.”

Provost points out that at last count, less than 5 percent of Vermont’s captives made the 831(b) tax election.

“Our philosophy in licensing any captive is that it has to make insurance sense. We expect companies to make all favourable tax elections that are available to them, but that has nothing to do with regulating the insurance company,” he says.

“If we have a conversation with a company that is interested in forming a captive in Vermont, and the discussion is 20 minutes of tax talk before the word ‘insurance’ is uttered, we’re not likely to be accepting an application.”