May Day!

IanMay 1st is here and with it the signs of spring… new beginnings.

As you all probably have heard by now, Vermont’s intrepid Ian Davis is leaving the Mother Ship and heading off to a new position within the captive family as Senior Vice President, Captive Insurance Relationship Manager at People’s United Bank. Ian will be responsible for business development, qualification, expansion and overall relationship management for the bank’s captive insurance portfolio.

Ian served as Director of Financial Services at the Vermont Department of Economic Development, leading the marketing and business development activities in support of the State’s captive insurance industry for three years. In that role he stepped into large shoes left by Dan Towle, who is the current president of CICA.

I am so glad for Ian in his new position and so, so glad he is staying in our world of captive insurance. Don’t get me wrong: he will be missed in his role with the State as he was the consummate professional, truly representing Vermont’s best in captive insurance. But very smart of People’s to recognize talent by putting Ian in a leadership role in their captive insurance arena.

As the State looks to fill Ian’s position, the estimable Tim Tierney will step in as interim director. Tim is Director of Recruitment and International Trade at Vermont’s Department of Economic Development. He already was helping us on our planned Mexico Trade Mission this September, and I am looking forward to continuing our work.

So goodbye… and welcome, Ian! I look forward to our continued partnership and, more importantly, our good friendship.

Thank you and stay safe!

Rich Smith
VCIA President

COVID – 19 (are virtual happy hours our future?)

Day Five of our quarantine. My family made the decision to self-isolate when my son returned from San Francisco this past Monday. His work took him on the subway, he was working in a restaurant downtown, and he took a cross-country flight so it seemed like a no brainer. Certainly, it is a little easier to self-isolate in rural Vermont than in downtown New York, or even Burlington, Vermont.

We are certainly in strange times and unchartered territory for most of us – even those of us whose job is risk management! I have found myself rationalizing that things can’t get that bad and that it will clear up soon, even with the reality slamming us in the face. It is hard for any person, company or government to jump to more draconian measures, even when we see what is happening in other places hit by the virus before the United States. A little dose of paranoia might make us, as a society, get a little ahead of the curve. Maybe its time to trust your inner Cassandra*.

That being said, my wife and I joined a few friends of ours on a virtual cocktail hour last night. I opened a bottle of wine, brought out some cheese, and then connected with the two other couples through videoconferencing. It sounds a little silly, but it worked great – and we were able to get a dose of social interaction at our kitchen table!

It still doesn’t explain why for some reason I stocked up on potato chips and Ben & Jerry’s last Sunday…

Thank you and stay safe!

Rich Smith
VCIA President

*Cassandra was a woman in Greek mythology cursed to utter true prophecies, but never to be believed. In modern usage her name is employed as a rhetorical device to indicate someone whose accurate prophecies are not believed.

COVID – 19 (redux)

Wow…. what a week. It’s hard to get my head around the speed at which the coronavirus has spread and its impact around the world. Countries in virtual shutdown, borders closed, business at a near standstill in many places.

Since last Friday, the news of major conferences cancelling (or at least postponing) is astonishing but warranted. One of the captive insurance industry’s major events is the CICA conference. Having had to cancel is truly a heartbreaking choice, but Dan Towle made the right choice – as painful as it was.

Dan was kind enough to contact me soon after he made the decision and walk through the decision matrix, as well as some of the hurdles he still faces in resolving all that needs to be resolved when you cancel a conference like his. He described the calls and discussions with his board and key members of his organization before having to make such a tough call.  One of the things that resonated with me from our conversation was the need to take a step back from the event you are planning and ask yourself “are we really asking people to travel and meet in a large group with this uncertainty?” With the news that followed of the growth in infections just days later it was clearly the responsible decision.

VCIA and the State of Vermont had to grapple with much the same choice when we decided to postpone the trade mission we had scheduled to Mexico City later this month – at a much less heartbreaking scale than Dan of course. Still, it was disappointing. That being said, it was much easier for us to reschedule, which we have done. The trade mission to Mexico City has a new date of September 22nd.

As for the VCIA conference in August, we are proceeding on schedule, with the hope that all this will be behind us by then. Like Dan, we may be faced with a tough choice come summertime, so I plan to stock up on Pepto Bismol in the meantime.

Thank you and I look forward to hearing from you!

Rich Smith, VCIA President

COVID – 19

The complexity and uncertainty of the coronavirus or COVID-19 outbreak is worrisome, to put it mildly. As of this writing, the virus has infected 90,000 people and left more than 3,000 people dead, mostly in China, but the spike in cases around the world remind me of those doomsday movies where it shows a map with the plague hopping from one place to another with ease.  When we get mixed messages from our leaders, and health experts debate the proper response, it is not surprising to see a growing anxiety in the general populace.

I have heard from two large companies in the insurance world that have very different responses for their employees. One has banned all non-essential travel not only overseas, but here in the US as well. The other has taken a more wait and see approach, advising employees to use “common sense” when traveling. Many businesses have asked their employees to work from homes – which won’t help someone on the factory floor or who works in a restaurant.

A couple of things come to mind as I try to get my head around the potential impact to captives. First, most traditional insurance policies have exclusions for pandemics in their policies. According to the Insurance Journal, the world’s largest insurers learned lessons from previous health crises, including the 2003 SARS outbreak, and have tightened up their policies, inserting communicable-disease exclusions to prevent potential losses. That means consumers and companies will bear the brunt of the cost for disruptions related to the virus. Whether captive insurance can help mitigate potential losses is something that we have begun to look into more closely.

The other impact is something captives and traditional insurers have been dealing with for some time. Investment returns have been stingy for the insurance world for many years and many have diversified away from more traditional bonds to equities. Investment losses rather than claims will likely cause the biggest hit to insurers from the coronavirus outbreak, according to a report from Moody’s Investor Services Inc.  Moody’s said, “A prolonged period of market weakness would also hurt insurers’ investment income and reduce their access to capital…”

As for me, I seem to swing back and forth after every news story I hear on the virus on what “common sense” means. Without a doubt, the COVID-19 has already had an impact on the world economy and our general sense of health and safety.  I believe in the resilience of the captive insurance industry and know that many of the people involved with risk management at their organizations will play an important part in stemming this outbreak.  Let’s all hope that we see the end of this sooner rather than later.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

Come Together

rich-in-washington

This week a group from the Captive Association Leadership Council (CALC) coordinated a visit to Washington DC to provide an educational baseline on the captive insurance industry to key policymakers and staff.  The idea is that providing a baseline on captives with the participation of numerous state captive associations will build a foundation for future discussions when presented with potentially adverse actions in Washington or opportunities to advance the industry as a whole.

CALC is an informal coalition representing most captive association leaders in the industry. This first visit as a coordinated group included me, Dan Towle from CICA, Joe Deems from NRRA, Joe Holahan representing the Captive Insurance Council of the District of Columbia, and Julie Bordo, President of PHC Mutual Insurance Company RRG (a captive owner and VCIA Member).

We met with staff members of key committees in the House and Senate (House Financial Services and Senate Banking) in the morning before heading over to Treasury to meet with key members of the Federal Insurance Office and Tax Policy. We explained the role of captives and the importance not only to the organizations that utilize them, but to the economy overall. We discussed some of the issues regarding the bad actors misusing captives, as well as tried to dispel myths regarding the industry. We heard directly from Treasury on issues they had concerning captives, which provided us with helpful insight.

This CALC trip to Washington DC is the first of what we hope will be many, to strengthen connections with key committee staff as well as home-state Senators and Members of Congress. Our inaugural trip was a success – connections were established with key staff who we will reconnect with if and when legislative issues arise regarding captives or RRGs.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

Tough Mudder

Business Insurance recently ran a story “Extreme sports test liability protections” (Feb 17) which described the challenges extreme race organizations have with potential liability issues.

“Drowning,” “near-drowning,” “animal bites,” “permanent paralysis” and “death” are all listed in waivers for these events. Signage posted by the organizers of race Tough Mudder — a major name in the sport — famously tells participants sweating through the obstacles to “remember, you signed a death waiver.” Yikes!

According to the article, in parallel with the rising popularity of the events are a growing number of lawsuits alleging organizers are liable for injuries incurred on the courses of the events.  The article goes on to say several companies in the industry are suffering financial problems, although it is unclear whether liability issues are contributing to their troubles.

After reading the story, two things come to mind.  First, these organizations should take a page from the U.S. Hang Gliding and Paragliding Association. In 2016, the Association formed a risk retention group (RRG) domiciled in Vermont. With a risk retention group, many people, companies or organizations pool their money and insure themselves collectively. The key requirement is that they are like entities — in this case hang gliders and paragliders — but it could be extreme racing organizations just as well.

“Working with Vermont was wonderful,” Tim Herr, secretary and risk management officer for Recreation Risk Retention Group Inc., (RRRG) said. “They understand the small niche insurance market. The first meeting is always filled with trepidation, but we showed them our plans and they understood what we needed and wanted to do.”  RRRG now has 29 member groups covering the flights of more than 9,000 USHPA members, 83 USHPA chapters, and more than 30,000 hang gliding and paragliding students annually.

The second thing that comes to mind upon reading the BI story is this:  did you know that some members of Vermont’s very own Department of Financial Regulation captive staff participate in these crazy races?! Deputy Commissioner Dave Provost himself, and Director of Examinations Dan Petterson have regularly put themselves at great bodily harm in these extreme obstacle course events.  And I think Sandy Bigglestone, Director of Captives, has tried it at least once too!

So, our two takeaways today are:

  1. Vermont regulators have personal knowledge of risks associated with extreme sports, and are willing and able to assist with unique risks from organizations of all sorts; and
  2. Don’t mess with Vermont (or at least, Vermont’s DFR)!

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

Happy Holidays and See You in 2020

Season’s Greetings and Happy Holidays to all of the VCIA family! It was another great year for captives in Vermont, and next year portends to be even better for the industry as a whole.

As I have talked to many of VCIA’s members in the course of the past month or so, “busy” seems to be the word that encapsulates the tone. I think that has been due to two main factors: the increasing sophistication of risk managers in smaller and medium-sized organizations, and the beginnings of a hardening insurance marketplace.

Vermont is set to add another 20+ captives to its stable of over 1000 licenses by year’s end, notwithstanding the competition, due in large part to Dave Provost and his team at DFR’s continued steadfast regulation, Ian Davis’ doggedness in pursuing captive leads, and captive service providers, who continue to recognize Vermont as the premier captive insurance domicile! Overall VCIA membership has increased 2% this year with 446 member organizations thanks to Janice Valgoi and her tireless work in adding to our roles.

I want to say thank you to VCIA’s Board of Directors for all their support and guidance over the past year to the association. I want to especially thank Wilda Seymour of Franklin Casualty Insurance Company RRG for her contribution as board chair starting in October of 2018, and welcome back Jan Klodowski of Agrisurance Inc. as our chair as of this past October.  Longtime captive expert attorney extraordinaire, Stephanie Mapes of Paul Frank + Collins, came on as our vice-chair.  Many thanks to Andrew Baillie of AES Global Insurance Company, independent consultant Donna Blair, Lawrence Cook of Sedgwick, Dennis Silvia of Cedar Consulting, Anne Marie Towle of Hylant, and Derick White of SRS. And on behalf of the staff, I would also like to welcome Tracy Hassett of EdHealth and Jason Palmer of Willis Towers Watson to the board.

We continue our strong focus on events and on legislative and regulatory issues on behalf of our members. Many thanks to Jim McIntyre, and his partner Chrys Lemon, in Washington and Jamie Feehan in Vermont for their wonderful service to VCIA.   And my great thanks to the VCIA staff! Without their hard work, smarts and enthusiasm, we would not be able to accomplish any of the wonderful things we do for our members.  Thank you to Diane Leach, Elizabeth Halpern, Peggy Companion, Janice Valgoi, Dave Rapuano and Megan Precourt – you are all terrific!

Most of all, thank you for all your support and another great year!

Rich Smith
VCIA President

Mixy Business

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Many thanks to all you who joined us Wednesday night for VCIA’s annual Holiday Mixer. We had around 120 of nearest and dearest friends attend at the Hilton taking time to greet and socialize with fellow VCIA members on a cold and ultimately snowy Vermont evening.

Many thanks to our sponsors of the event: our friends at Crowe right up the street, and the folks of NAMIC Insurance Solutions (NAMICO) who came all the way from Indianapolis! Tim Sullivan, Kristen Strasser, and Ted Doughman braved the “friendly” skies to join us.  It is one of my favorite nights of the year, when friends come together with no agenda except to enjoy each other’s company as we head into the holiday season.

I also want to congratulate David Guerino as SVP & Managing Director of KeyState Captive Management.  Dave was there with some of his fellow KeyState colleagues as well, Jeff Vigne and Alicia Huskes. KeyState is a relatively new VCIA member and just announced plans to establish an office in Burlington, Vermont in early 2020.

Thank you again and I look forward to hearing from you!

Rich Smith
VCIA President

 

Taxing Talk

2019-tax-panelJoin us next week As VCIA presents its annual captive taxation update! On December 12th, a group of noted captive tax specialists will inform you of the latest 2019 tax developments impacting captive insurers. Our panel will provide details on specific tax authorities and court rulings released over the past year to provide further insight into the ever-shaping landscape of captive taxation. The panel will also explore the latest changes from the U.S. Tax Reform bill enacted a couple of years ago, its impact on captives, and how best to plan for year-end.

Our panelists will be Saren Goldner, Partner at Eversheds Sutherland, Kristen Hazel, Partner at McDermott Will & Emery, and Alicia Miller, Tax Senior at Crowe.  Each of these experts are considered respective authorities of captive taxation in their various capacities, and all are members of firms who have a strong presence in the captive industry and work tirelessly for the benefit of all.

This webinar offers a great opportunity for all stakeholders to keep up with the latest tax developments in efforts to make informed decisions at the highest level of corporate governance for your captive.  You will walk away learning about recent changes from the U.S. Tax Reform bill that will affect the status of captive insurers; Washington State’s recent approach toward taxing captive entities and some results of recent court cases;  the basics of Johnson & Johnson’s successful appeal in its $55 million NJ Self Procurement Tax Refund Case; recent developments involving insurance characterization, including risk pools and alternative premium characterization; and the IRS’s continued focus on smaller captive insurance companies and understand best practices learned from the cases in this area.

Click here for more information. I hope you will be able to join us!

Rich Smith
VCIA President

It’s a Hard Market

OK, time to fess up. In a blog in February 2018, I dismissed the rumor that a hardening insurance market was on its way. As a matter of fact, I stated “Next time I get asked by a reporter whether I think a hard market is coming our way, I will give them the same answer I gave at the end of last year: hard market, schmard market” – ouch!

Well, as we are all aware, the insurance market has certainly been hardening over the last year. Even though I still believe that the broader insurance market is more stable now, with better loss control, better data, more capital, and the maturation of the captive insurance industry, it is tightening. According to the second quarter 2019 Marsh Global Insurance Market Index, commercial property rates in the U.S. increased nearly 10% in the second quarter, which is twice the level of recent quarters.

And though the hardening market is impacting several different lines, I thought the explanation as reported in Business Insurance by Bret Ahnell, Executive Vice President of Staff Operations at FM Global, on property insurance (a large area in the captive marketplace) was instructive:

1.) The commercial property insurance industry has been losing money.  There have been declining rates industry-wide for more than a decade while carriers have offered broader coverages.  At the same time the industry has been contending with increased risk as a result of global economic expansion.  In fact, the property and casualty industry has been above a 100 combined ratio in 6 of the last 9 years. Only 2013-2015 were profitable, explained by extremely low losses from natural disasters.  Yet, when big natural catastrophe losses resulted from events, including hail, hurricanes, flooding, wildfires, and monsoons, the industry again posted losses in 2017 and 2018.

2.) Bonds markets have remained lackluster.  While investment yields in the stock market have been favorable during this time, the returns in the bond markets — which most insurers primarily rely upon for investment income — have remained lackluster.  The result is the industry hasn’t been able to use their investments to offset bad underwriting results. Carriers have had to adjust rates and coverages as needed to better ensure an underwriting profit.

3.) Regulators are gaining more sway in underwriting behavior.  The role of regulators is having an impact on underwriting behavior and discipline.  More than ever the insurance industry needs to be able to demonstrate sustainable business models and profitability across each line of business.

4.) New U.S. tax laws have increased tax liability while driving down profitability. Where previously carriers could write off 35% of a loss, today, it is only 21%, which ultimately means more selectivity when placing capacity.

It all adds up to a commercial property market that requires underwriting discipline and a continued correction over time. And, in this market, those clients who understand and commit to property loss prevention and risk engineering will do better than those who don’t.  That means captive owners will most likely be adding more to their risk portfolios.

On that cheery note, I hope you all have a wonderful and safe Thanksgiving!

Rich Smith
VCIA President