Mud Season

Mud-1913-VHS-Albright-20190611Just a brief check-in with everyone out there in these unprecedented times. The VCIA staff and I sincerely hope that you are all navigating this situation as skillfully as possible and are staying well.  Things have not radically changed since last week —like many governors, Vermont Governor Phil Scott has issued a stay-at-home order in place until April 30th. Gov. Scott says he expects to extend that timeline but it’s unclear right now for how long.

All organizations are seeking a road map through this crisis, but it has been difficult. We all operate best on data and information, but as we know, things seem to change daily. As Janice Valgoi said on a staff call this week, it seems appropriate that we are in Mud Season here in Vermont; as everything is about as clear as mud for the time being. Let’s hope we all gain some clarity in the next few weeks. And let’s especially hope that the health of our many communities fares as well as possible.

VCIA continues to push forward with all staff working from home. It has been great hearing from our captive insurance friends on how they are doing and sharing stories within this crisis. As usual, many captive professionals continue to surprise and inspire VCIA with their creative thinking and problem-solving skills. Our members truly are the best and the brightest. Thank you all.

Please feel free to reach out to any of us here at VCIA if we can be of help in any way (or you just want to say hello).  VCIA is presenting a webinar May 14th covering current market conditions, impacts on captives, and raising good questions and discussion on the current crisis. Be sure to join us!

Thank you and stay safe!

Rich Smith
VCIA President

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

man-having-glass-of-white-wine-looking-at-laptop-royalty-free-image-1584450201Day 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

coronavirus-graphic-web-feature

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

rich-tough-mudderBusiness 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

The Devil Gets His Due: 831(b)s

devilThe Internal Revenue Service has pumped up the volume on their efforts to go after fraudulent 831(b) captives and their promoters. And although no industry likes the thought of being singled out by our nation’s tax collectors, it is hardly surprising.

Solomon Teague of Captive International recently reported that the IRS has scored some notable victories against abusive micro-captive insurance tax shelters in recent years, with settlement offers to some 200 captives last September. Flush with victory, the IRS has established 12 new examination teams to go after taxpayers using 831(b) captive insurance vehicles to avoid paying taxes, thereby significantly ramping up the pressure that has grown up around these shelters.  It will open additional examinations and use all available enforcement tools, including summonses, to obtain the necessary information, the IRS said in its statement.

The IRS has been concerned about abusive micro-captives for several years. It has named these transactions on its Dirty Dozen list of tax scams since 2014. In 2016, the Department of the Treasury and IRS issued Notice 2016-66, identifying certain micro-captive transactions as having the potential for tax avoidance and evasion.

As Solomon reported, the IRS’s position was bolstered by three US Tax Court decisions, each confirming that certain micro-captive arrangements are not eligible for federal tax benefits, along with settlement offer letters to “up to 200” micro-captives that it suspected were not engaged in legitimate insurance activities. According to the IRS, nearly 80 percent of taxpayers who received its settlement offer elected to accept it. “The IRS has collected huge sums of money in recent months from the settlements it has reached and has amassed quite a war chest. The more it goes after these captives the more money it makes, so it is only logical that it keeps up the pressure,” according to an expert in his article.

VCIA, and others in the industry, has been warning about the impact of these less-than-honest facilities for some time. What the IRS is doing only affects a very small portion of the captive insurance sector, being risk-pooled 831(b) captives. The IRS is not taking any actions against captive insurance companies generally. The IRS is not even pursuing all captive insurance companies that have made the 831(b) election. No Vermont captives have been under scrutiny.

It will be interesting to see how this is reflected in the captive numbers released by the states whose insurance departments made a big deal about mass-licensing so many captives, nearly all of which were 831(b) captives of the risk-pooled varietal. As we have seen before in the captive industry, new captive domiciles will sometimes loosen regulatory standards in order to drive new captive formations – and put out press releases attesting to the growth in their states.

As I said in the beginning, no industry likes the headlines about IRS scrutiny. But I am hopeful this will clean up a particularly bad set of apples in ours.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

And We Are Off!

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Thanks to all of you who joined us for another successful VCIA Legislative Day this week at Vermont’s State House in bustling Montpelier! Our members, including many who came from afar, got to hear from Vermont’s new Secretary of Commerce Lindsay Kurrle, as well as Vermont’s Commissioner of Financial Regulation Mike Pieciak during our luncheon. Later in the day our members met and heard from Vermont’s Lt. Gov. David Zuckerman, speaker of the House Mitzi Johnson, and House Minority Leader Patty McCoy. Although these dignitaries represent different parties under the Gold Dome, what they do have in common is their unwavering support of the captive insurance industry in Vermont.

At our luncheon, special guest economist Jeff Carr unveiled a recently completed economic contribution study of the captive insurance industry in Vermont. Suffice it to say that this industry is a tiny powerhouse here in Vermont! Immediately following, the folks from DFR provided a Q & A session for our members on recent updates and activities at the department. We provided a live stream via Facebook for our members.

In the afternoon, we testified before the House Commerce Committee, where Vermont’s Director of Financial Services, Ian Davis, and I gave updates on VCIA and the state of the industry. New VCIA Board Member, Tracy Hassett, President of EdHealth, did a terrific job describing her organization and the reasons they formed a captive in Vermont. In Senate Finance, Ian and I repeated our testimony and Deputy Commissioner Dave Provost concluded with a review of this year’s captive bill, S-255.

The great news is that the following day, Senate Finance voted out the bill 7-0 clearing the first hurdle in the legislative process. There are several sections of the bill, including lowering the minimum capital for sponsored captives from $250,000 to $100,000. The bill also proposes to expand to sponsored cell captives what we passed last year to all captives: provide flexibility in investments by giving companies the option to follow the old rules or develop a plan for DFR approval. Finally, the bill proposes to clarify disclosure requirements for agency captives – we may have been too prescriptive in the disclosure requirement built into the statute when passed last year.

Please click here to access a copy of the bill.

Thank you again to all of you who participated, and I look forward to hearing from you!

Rich Smith
VCIA President