Two Sides of the Same Coin

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Talk to most business people anywhere and the thought of “regulation” can make them bristle. And with good reason. Often times overzealous regulators help create overzealous regulations that are intended to protect citizens or the environment or fair markets but can instead create sweeping mandates that do more harm than good. To wit, the Trump administration’s proposal reducing regulations for American businesses by requiring that for every new rule proposed, two should be repealed.

This has reminded me of my old friend and former CICA President Dennis Harwick’s dictum he called the ‘regulatory imperative’: First and foremost, regulators live in terror of being accused of failing to protect consumers in whatever industry they are regulating. Second, they want everything and everybody they regulate to fit into a single template.

Captives—by nature and definition—tend not to fit within that regulatory dynamic. As Vermont’s chief captive regulator, Dave Provost, is fond of saying, ‘When you’ve seen one captive, you’ve seen one captive.’ Captives don’t usually fit into a template, due to the uniqueness of the risks and plans of their specific owners. Also, the consumer protection element is vastly reduced by the fact that the ‘consumers’ actually build and own the captive.

I think the anti-regulatory wave could be a double-edged sword for captives. On the one hand, rolling back regulations does open the door for more opportunity for American businesses.  And certainly for captives there have been numerous instances where regulations have had a deleterious impact on our industry, primarily at the federal level, but also in states with little or no understanding of captive insurance concepts.

But deregulation could introduce some uncertainty for underwriters as regulations often are created to reduce risk for businesses. In an article in Risk & Insurance by Katie Siegel this past April, she writes that if regulation goes away, some risk comes back. Maybe not right away, but with a lack of oversight in some key areas of safety and loss prevention, those risks may start to creep up again and result in unintended losses. And underwriters also rely on federal regulations to provide a reliable risk management framework by creating a reliable compliance framework for all companies to follow.

Good, strong regulation is consistent with the mission of the parent organizations that license their captives in Vermont. The best risk managers understand that adhering to high standards is as much about good business as it is about compliance.  After all, it’s their money at risk!

I look forward to hearing from you.

Rich Smith
VCIA President

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