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

I Kind of Like the Swamp…

rich-swamp-2I am down in Washington for a couple of days meeting with various Congressional staff people about moving the Captive Clarity Bill forward, slowly but surely.

The Captive Clarity Bill is seeking to clarify (hence the name!) an issue passed in legislation a number of years ago.  Within the Dodd-Frank Act was passed the Nonadmitted and Reinsurance Reform Act (NRRA), which was intended to streamline the regulation and taxation of surplus lines insurance. However, 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.”

Currently, captives are taxed and regulated in the state that they are domiciled regardless of where their corporate owners’ headquarters may be located. Under NRRA, the home state could assert the right to tax the self-procured insurance premiums written within the captive entity even though the state of domicile already charges the captive a premium tax.  It would suddenly penalize many companies by double taxing them for being domiciled in a state that is not their home state.  Although the Act does not give states any additional taxing authority, the prospect of nondomiciliary states accessing additional insurance transactions to tax has increased the risk of states attempting to impose new taxes on captive insurance. On the other side of that coin, domiciliary states may be at risk of losing their ability to collect premium taxes and regulate certain aspects of captive insurance.

Ian Davis, Director of Financial Services for the State of Vermont, and I will be meeting with our Vermont contingent, Patrick Satalin with Rep. Welch (D-VT), and Erica Chabot and JP Dowd with Senator Leahy’s Office. We will also be meeting with key Congressional staffers, including John Hair with Rep. Sean Duffy (R-WI) – Chairman of the Housing and Insurance Subcommittee, Saat Altey with Senator Tim Scott (R-SC) – Member of the Senate Banking and Insurance Subcommittee, Brandon Beall, Professional Staff for Insurance, Senate Banking Committee, and Amanda Fischer, Director of the Democrat/Minority Policy for the House Financial Services Committee. Finally, I will be meeting with Richard Ifft in the Federal Insurance Office at the Treasury Department. Phew… I need a break just looking at the list!

Jim McIntyre and I will be providing a full legislative report during the VCIA Annual Conference to VCIA Members attending the  Annual Meeting, so come on by and find out more!

We look forward to seeing you in Vermont in August. Thank you all very much, and I look forward to hearing from you soon.

Rich Smith
VCIA President

A Nice Little Holiday Gift from Congress

statehous-with-bow

As reported by Business Insurance on December 13th, the House Financial Services Committee adopted legislation that aims to preserve the U.S. state-based system of insurance regulation and gives Congress greater oversight and transparency on international insurance standard negotiations.

As beneficiaries of the strong, state-based insurance regulatory framework, the captive insurance industry applauds the goal of this legislation. The bill was introduced in response to concerns expressed about the covered agreement signed by the United States and the European Union to address the U.S. lack of equivalency related to the bloc’s Solvency II directive for the insurance industry. Although we supported the covered agreement in terms of trying to create parity between jurisdictions, the NAIC objected to what they believe to be a lack of transparency and consultation with state regulators on the issue.

As reported in BI, the bill states that entities representing the United States may not agree to insurance-related international agreements unless they are consistent with and recognize existing federal and state law, particularly on the regulation of insurance. U.S. federal entities participating in negotiations would be required to coordinate and consult with state insurance commissioners, according to the bill.

Whether this bill gets enough immediate traction to pass in the next year remains to be seen. I think it does bode well that Congress reiterate the near supremacy in states regulating insurance (I say “near supremacy” because Congress can always change its mind!).

Thank you and I look forward to hearing from you.

Rich Smith
VCIA President

state-of-the-unionEvery year VCIA hosts a webinar for our members that provides an informative and timely update on VCIA legislative activities on behalf of our members and the industry.  We call it “Captive State of the Union” because, like the President’s address to Congress every January, this is a chance for our members to hear just what’s going on in Montpelier, Washington, and across the world.  I will be joined by Dave Provost, Deputy Commissioner for Captive Insurance at the Vermont Department of Financial Regulation, and Jim McIntyre, VCIA’s representative in Washington for an overview of new and pending regulations in the state and in Washington D.C. and the NAIC.  The webinar is for VCIA Members only and is free of charge!

This is a relaxed but informative hour where we will discuss issues like the potential impact of tax reform on captives, status of the Captive Insurers Clarification Act, the Vermont captive bill signed into law this past spring, and updates from the NAIC, including the proposed NAIC Insurance Data Security Model Law, XXX / AXXX regulations and proposal to collect expanded mid-year investment information, plus more.  So join us on October 19th from 2:00 – 3:00 pm ET and become informed!

Thank you and I look forward to hearing from you.

Rich Smith
VCIA President

Mr. Smith Goes to Washington

mrsmithgoestowashington

You may have heard about Richard Smith being grilled in Congress this week over a huge data breach that exposed millions of Americans’ personal information. I just want assure you that I am not THAT Richard Smith!

I think our industry has been very focused on cyber security for some time now, both in their businesses and as an opportunity to craft a captive solution for their clients – and I have certainly blogged it to death so enough said. That still has not stopped the NAIC from proposing to adopt a Data Security Model Law this year. If you have not seen it you can download it here:

Data Security Model Law (click here to view)

And although it becomes another “thing” to deal with in our industry, there is no doubt that a cybersecurity plan is a necessary element of any good captive management plan. I give Vermont’s insurance commissioner, Mike Pieciak, and his dauntless captive team high marks for keeping the NAIC’s model act as manageable as possible.

In the meantime, this Mr. Smith will be heading to Washington this fall to meet with congressional staff and leaders on the hill about issues impacting captive insurance.  Hopefully, I will get a little warmer welcome than my namesake!

Thank you and I look forward to hearing from you.

Rich Smith
VCIA President