Let the Games Begin (and Congrats Vermont – Again)!

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The Vermont General Assembly began the first half of the legislative biennium this month. Both houses of the Vermont legislature now have a supermajority of Democrats, so Governor Scott (R) will have less room to push back on any legislation he doesn’t support. That being said, the House Commerce Committee’s new chair is Mike Marcotte, a Republican and former vice chair of the committee. Senate Finance remains in the hands of veteran Ann Cummings; both these committees oversee captive insurance in Vermont and both are strong captive insurance supporters.

As we do every year, VCIA initiated a process to build an agenda for suggested changes to the captive statutes for the 2019 legislative session.   With the results from our membership survey in hand, we meet with  Vermont’s captive management firms and law firms to hear their suggested changes. Then comes an iterative process with Dave Provost’s team at Vermont’s Department of Financial Regulation resulting in a consensus bill to present to the legislature. This year’s captive bill will be mostly tweaks and technical corrections, but even those are important in staying current in our ever-changing industry.

On another note, congratulations again to DFR and the State of Vermont! For the fifth straight year, Vermont was ranked the BEST  insurance regulatory environment in the United States, according to the R Street Institute’s  Insurance Regulation Report Card, an annual examination of which states best regulate the business of insurance.

Don’t forget that January 23rd  is VCIA’s annual Legislative Day in Montpelier, Vermont’s capital. It’s a full day of meeting and hearing from Vermont’s political leaders on the captive industry and issues facing the State broadly. Go to www.vcia.com and register today!

Thank you and I look forward to hearing from you.

Rich Smith
VCIA President

Washington State News

Rubber stamp "TAX"You have probably already heard of the recent pronouncement by the Office of the Insurance Commissioner in Washington State “allowing captive insurance companies that have unlawfully insured any risk in Washington State in the past 15 years to pay a substantially reduced fine and premium tax penalty for self-reporting the activity.”

The fact that the Washington State believes they can basically outlaw captive insurance with a press release is disturbing at best. It contradicts established federal law on insurance and creates a direct threat to the industry for those organizations that have risks in the state covered with a captive.  In the original legal filing by the K&L Gates law firm on the Microsoft case, they laid out the comprehensive argument that (1) the Office of the Insurance Commissioner (OIC) does not have the authority to regulate self-insurance; (2) the captive was not in the business of making contracts of insurance and therefore excluded from the definition of “insurer”; (3) the captive is outside the scope of the OIC’s authority under the federal McCarran-Ferguson Act litigated under Todd Shipyards; and (4) the OIC was outside its bounds to try and tax premiums related to risks outside the State of Washington.

VCIA is working with CICA and our other captive insurance partners on a cohesive response to the bulletin. In the meantime, I would advise captives with Washington State presence to check with their captive advisors on the issue.  We strongly urge you to give it some time before deciding to comply with the release.

I look forwarded to hearing from you!

Buckle Up – Turbulence Ahead

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Unlike 2016 when all the polls were wrong, the 2018 midterms turned out mostly as predicted—the House of Representatives flipped to Democratic control, and the Senate remained in Republican hands, with the Republicans likely expanding their majority. Though it is too soon to tell exactly what the divided Congress will mean on every issue and for every committee, with the help of VCIA’s Washington advisors, Capitol Counsel, here are some thoughts on how this all impacts the captive insurance industry.

November was dominated by party leadership elections and policy negotiations behind closed doors on outstanding issues. The most pressing order of business for the lame duck is appropriations. The Continuing Resolution (CR) funding many government functions is set to expire on December 7. After leadership elections, negotiations on government funding should continue; however, these negotiations will be contentious since President Trump has said he will not sign an appropriations bill without funding for “the wall,” and Democrats have adamantly opposed significant wall funding. Several authorizations are set to expire during the lame duck session and require action from Congress. Given the flip of House control, clean, short-term extensions may be the most likely path as the new House Democratic majority may choose to fight on more favorable ground next year.

With the leadership elections in November, and after some handwringing, Democratic Leader Nancy Pelosi (D-CA) retained her position and looks set to take the gavel as Speaker in January. In the Senate, though the Republicans retain the majority, Sen. Elizabeth Warren (D-MA) will likely remain on the Banking Committee and will remain a voice on the left on all issues financial services. Though they may not be able to pass any bills on these issues in a Republican-controlled House, we expect their messages to be echoed by future-Chair of the Financial Services Committee Rep. Maxine Waters (D-CA) in the House, meaning a continued spotlight on these issues.

Although Rep. Waters does not have a stated position on the captive insurance industry one way or the other, it is most likely she will defer to the NAIC on most issues that impact insurance.  She is the polar opposite of the current Chairman, Rep. Jeb Hensarling (R-TX). She is active on financial consumer issues and has been highly critical of the Trump administration for rolling back consumer protection, however, she is also seen as a dealmaker, and so it is unclear if she will govern the committee to the left, or if she will moderate and move to the center as Chairman.

There are a number of insurance-related issues that may see action next Congress.  The captive insurance industry is hopeful that Congress will ultimately pass the Captive Insurers Clarification Act, originally introduced by Senator Patrick Leahy (D-VT) and Senator Lindsay Graham (R-SC) to amend the Nonadmitted and Reinsurance Reform Act (NRRA), which was intended to streamline the regulation and taxation of surplus lines insurance. Some of the definitions in the Act are so broad that questions have been raised about its effect on captive insurance. If captive insurance is considered “nonadmitted insurance” under the NRRA, captive insureds may be required to pay a premium tax to their home state in addition to their captives paying domiciliary state premium taxes, and be partially regulated by, the insured’s “home state.”

As Congress comes back to town, it is clear that there will be significant action in both the lame duck and in the next Congress on many areas of importance to the captive insurance industry. Even with divided government, there are issues that must be addressed such as government funding and expiring authorizations, and there are areas where there could be bipartisan agreement.  So, while much has changed as a result of the election, the work of Congress and the administration will continue. As we have learned over the past two years, Washington, D.C. is full of surprises. There will likely be issues that arise that we could not predict, and how President Trump positions himself and the administration in the next two years will be important. If the President chooses to work with House Democrats on areas of interest, following the populist tone he has sometimes taken, we could see more compromise and agreement than expected – let’s hope so.

I look forward to hearing from you!

Rich Smith
VCIA President

The Great Wall and Beyond

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As I mentioned in my last blog, I traveled to China right before the Thanksgiving holiday to speak before the 2018 Jing-Jin-Ji International Insurance Forum in Tianjin. My presentation focused on the introduction of Vermont’s captive market, development and supervision. I also participated on a panel that discussed the captive rules in Asia, U.S. and Europe, best practice and the latest innovation, with insurance supervisors from Hong Kong, Singapore and Guernsey as well.  I focused on how Vermont regulators create a “partnership” with the captive insurance companies while keeping a strong regulatory hand on the tiller. I emphasized the support from Vermont’s political leadership as well. This message was well received by my Chinese captive insurance colleagues.

IMG_1613It was a great trip, especially to see and hear how the China captive market is emerging. As I mentioned last time, there is a relatively small number of captives in China right now – and mostly held by state-owned enterprises (SOEs) like COSCO shipping, Sinopec and China Railway. However, there is a growing interest in captive insurance for private enterprises and other SOEs looking to better manage their risk.

The Chinese captive industry is very limited in scope right now. Like most regulators when presented with a new-fangled way of doing business, the China Banking and Insurance Regulatory Commission is taking a go-slow approach to captive insurance. The industry in China is looking to pick up steam and get interested parties from privately owned businesses to consider captives. They are also interested in helping move Chinese regulators to broaden the limits on captives currently in place.  And while it may be a long-shot to get a Chinese captive to domicile in Vermont, the fact that they are looking at VCIA as a place to learn illustrates the continued leadership of Vermont in the growing worldwide industry.  I look forward to continuing this dialogue and seeing how the Chinese captive industry evolves.

IMG_1614I want to thank in particular my colleague Geoffrey Cao, President of the Chinese Captive Insurance Association, who invited me over and played gracious host while I was in China. And a HUGE thank you to Christina Kindstedt, Senior Vice President of Advantage Insurance Management (USA), who provided a go-between with me and my Chinese counterparts, as well as helping with my trip every step of the way.  Thank you both so much!

I look forward to hearing from you!

Rich Smith
VCIA President

Off to China!

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I am very excited to be heading off to China this week. At our conference this past August, VCIA hosted a delegation from China, including the head of the Chinese captive insurance association and the risk manager from COSCO, China’s enormous shipping company. Andrew Baillie, who runs the captive for AES (and a recently minted VCIA board member) moderated the panel with our Chinese guests with the able services of Christina Kindstedt of AIM providing translation services.

The Chinese delegation was so impressed with our conference that they invited me to join them this week in Tianjin on a panel at the 2018 Jing-Jin-Ji International Insurance Forum.  The topics on the panel will include the captive rules comparison in Asia, U.S. and Europe, best practice and the latest innovation. They have invited insurance supervisors from HK, Singapore, Malaysia and Guernsey to join the panel as well. They have also arranged a solo report for me on the introduction of the Vermont captive market, development and supervision.

Right now, there is a relatively small number of captives in China – and mostly held by state-owned enterprises (SOEs) like COSCO. However, there seems to be a growing interest in captive insurance for private enterprises and other SOEs looking to better manage their risk.  And while it may a long-shot to get a Chinese captive to domicile in Vermont, the fact that they are looking at VCIA as a place to learn illustrates the continued leadership of Vermont in the growing worldwide industry.

As they say in China: 我期待着您的回音

(I look forward to hearing from you!)

Rich Smith
VCIA President

Rocky Mountain High

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First, shame on you for thinking I was going to milk our VCIA Road Show to Denver next week with some type of cannabis-related pun or joke. John Denver television specials were a big part of my memories growing up, of course.

Second, yes we will be in downtown Denver on Wednesday, November 7th with our Road Show, at the IMA Corporate Office. Starting at 1:00 local time we will spread the good word about captive insurance to folks in the Mountain Time Zone.  The Original Captive Insurance Road Shows are structured for the maximum education and networking that four hours will allow. The afternoon includes two educational seminars featuring captive owners and captive professional panelists including the Vermont Deputy Commissioner of Captives, who document their companies’ experiences in forming and operating a Vermont captive. Our two owners are a couple of old hats at this game (I could get in trouble for calling them old hats).

Jan Klodowski is the vice president of Agri-Services Agency Inc. a wholly owned subsidiary of Dairy Farmers of America. She is the administrator for Agrisurance Inc., a Vermont domiciled Sponsored Captive that provides Workers’ Comp and Health coverages for the farming and agricultural industry in the United States. Part of Jan’s responsibilities includes the development and management of successful Captive/Alternative Risk Financing programs for their members. Jan is a licensed Insurance Broker and holds the designations of Associate in Captive Insurance and the Associate in Risk Management.

And Heather McClure is an executive director of operations at OU Physicians. She is a licensed attorney in Oklahoma and Texas with an LL.M. in Health Care Law. Heather has worked exclusively for hospitals and physicians for over 20 years. She is responsible for risk management, professional liability, and patient safety for the multi-specialty academic medical practice, which includes partnerships with multiple hospitals across Oklahoma and encompasses nearly every adult and pediatric specialty as well as 72 ambulatory clinics. Heather is also the Chief Operating Officer of OU Physicians’ captive professional liability insurer, Academic Physicians Insurance Company, which covers approximately 750 faculty physicians, 700 resident physicians and 700 medical students at the University of Oklahoma College of Medicine.

The afternoon wraps up with a networking reception for all attendees. CPE / CLE credit available for seminar participation. VCIA members and nonmembers alike who have captives, serve captives or are exploring the formation of captives are invited to attend!  Go to www.vcia.com to get more information and register.

I can’t wait to feel the sunshine on my shoulders!  Ah, the grass is always greener…

Rich Smith
VCIA President

Credit Risk

Rich-monopoly-manWith the renewed tension between the US and China, well, lets’ face it, the World, on trade issues, it’s a good idea to look at a captive to help mitigate such risks. President Trump just announced $250 billion dollars in tariffs targeting Chinese products, on top of previous tariffs already announced. One could argue whether it’s a good policy or not, but the facts that there will be increased risks in international trade is a fact.

As countries ratchet up the rhetoric and retaliation, insurers are weighing how companies will deal with the pressure. Trade credit insurance protects companies from the risk that buyers will be unable to pay. If governments implement more tariffs, it could increase the cost of production and ultimately put stress on retailers and distributors to either raise prices on consumers or shrink profits. If the stress is enough to put the buyer out of business, the supplier would activate its trade credit insurance to get reimbursed for defaulted payments, for example.

As reported in Insurance Business America in June, the potential failure of an agreement on NAFTA also presents risks. If NAFTA fails or is dramatically renegotiated, companies will be forced to redraft their production models and their supply chains. That will take a lot of money, time and could significantly increase their credit risk.

Forward-thinking organizations with international exposure are now seeing the benefits of bringing their own captive insurance company into the equation as a way to control the risks. Thus, trade credit and political risk are joining the growing list of non-traditional lines that captive managers are now using to better leverage the benefits of their captive.  Structured many ways, using a mix of fronting and reinsurance, some of the benefits could be:

  • Diversification of the captive into trade credit risks, which are not historically correlated with property and casualty risks
  • Additional premium flow into the captive and resulting investment income
  • Non-cancelable trade credit insurance coverage
  • An additional set of experienced eyes on the credit risks that the customer is taking onto its balance sheet

Ultimately, trade credit insurance can help companies apply longer-term risk management strategies. However, the continuing trade war puts every part of the economy at risk, and any trade risk insurance can only help so much.

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President