Keep Moving Forward

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A couple of quick updates from the President’s corner…

We are in the process of surveying our members and talking to captive leaders here in Vermont about potential changes to Vermont’s captive statute. After gathering ideas and vetting them internally, we meet with the leadership team at DFR and begin an iterative process that will ultimately produce a “captive bill” for introduction to the Vermont legislature in January. Coming in with a coordinated bill between the regulators and the industry gives us the clout to move a bill quickly to passage. If you have any good ideas (hey, even crazy ideas) send them my way – you never know!

Just a quick note to let folks know I will be attending the SIIA (Self-Insurance Institute of America) conference in Austin starting this Sunday and then heading directly to the NRRA (National Risk Retention Association) in Chicago on Tuesday night. SIIA is a member-based association dedicated to protecting and promoting the business interests of companies involved in the self-insurance and alternative risk transfer (ART) industry, including captive insurance. It’s a great opportunity to meet and talk to others in the self-insurance world. And NRRA’s conference brings together the leaders in the RRG industry annually to discuss the opportunities and challenges in the world of Risk Retention Groups. Vermont has more RRGs licensed than any other captive domicile.

And finally, I want to give a shout out to Bob Gagliardi from AIG (and VCIA Board Member) for his promotion. Bob was recently promoted to AIG’s Global Director of Captive Management and US Fronting. Our expectation is that AIG will need to build a new skyscraper in downtown Burlington to fit the whole operation.  Congrats, Bob!

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

Rich Smith, VCIA President

Back in the Saddle…

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Thanks to all who joined us in beautiful Burlington, Vermont, a couple of weeks ago for VCIA’s annual conference. Without a doubt, it was a terrific 2 ½ days with great programs, networking and events. With over 1000 attendees from 41 states and 14 countries, our annual gathering in August has grown to be THE captive insurance forum! To quote from one of our attendees “All the important captive market players from North America and parts of Europe were in attendance.” And many thanks to our sponsors and exhibitors without whom we could not put on such an event, as well as to the hundreds of volunteers who make it happen.

Now after a little break, we are back in the saddle again looking out for the captive industry. Currently we are working with U.S. Treasury on changes to the TRIA data call for captives, fighting to pass the NRRA clarification bill, and generally looking out for the captive insurance industry. You got to be a tough hombre to keep the posse moving!

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

Rich Smith
VCIA President

The Power of Risk Managers

blogcapitolEarlier this week, RIMS (the Risk & Insurance Management Society Inc.) held their annual “RIMS on the Hill” legislative summit in Washington DC. RIMS is a global not-for-profit organization representing more than 3,500 industrial, service, nonprofit, charitable and government entities of more than 11,000 risk management professionals.  At the RIMS 2016 Legislative Summit, members from across United States held 70 meetings with legislators and Congressional staff focused on three legislative initiatives: proposed legislation on cyber security, ADA protection and tax treatment for captives.

Thanks to the hard work of VCIA’s Washington counsel, Jim McIntyre, RIMS highlighted their support for the Captive Insurers Clarification Act, S. 1561, introduced by Vermont Sen. Patrick Leahy and South Carolina Sen. Lindsey Graham on the behalf of the captive insurance industry. As most of you know, the bill would officially omit captive insurers from the Nonadmitted and Reinsurance Reform Act. The act failed to explicitly exclude captives from the definition of “nonadmitted insurers,” which leaves insureds unclear on whether independent procurement taxes on the insurance purchased from their captive must be paid to their home state in addition to the captive domicile.

Having the preeminent risk managers organization make the captive bill one of their top three priorities is, well there is no other way of saying it, “HUGE”! Because they represent the risk managers from such a variety of important organizations, Congress listens. Let’s hope Capitol Hill will do more than pay heed; but act!

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

Rich Smith,
VCIA President

What’s Up, Doc?

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Janice Valgoi and I are in DC this week for the 2016 PIAA Medical Liability Conference, where we are working the floor spreading the good word about captive insurance. The conference brings together hundreds of professionals who work in insurance and alternative risk transfer, all looking to gain new insights on the global and day-to-day issues facing medical liability.

Today, no industry is changing as quickly or fundamentally as healthcare. At the same time, escalating medical professional liability costs have become a critical issue for health care providers and those seeking to improve health care value and outcomes.  Healthcare continues to be one of Vermont’s most abundant sectors. Currently 96 hospital and doctors’ groups have Vermont Captives, making it the second largest sector for captives trailing manufacturing with 100.

Successful MPL captives can measure the success of hospitals and physician groups in improving the safety of care by the degree to which malpractice asserts for those organizations declined over time. After all, everything else being equal, if safety has improved, the chance of doing harm and being sued should drop.  Further, to the extent a captive is successful at helping its members carry out risk management programs, actuarial assumptions can be modified, and premiums should go down.  Also, since previous premiums were based on old actuarial assumptions, an effective captive should generate a surplus in earnings that can be returned to its members. Save money = save lives!

If you are at the PIAA conference, swing on by to say hello!

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

Richard Smith,
VCIA President

RIMS and the Commish…

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Susan Donegan, Vermont’s Commissioner of the Department of Financial Regulation,has announced that she will be stepping down in June. Susan has been a true friend of the captive industry.

I hope to see a number of you at the RIMS conference this week in San Diego. Janice and I are working the Vermont booth (#2355) with Dan Towle, Dave Provost, Sandy Bigglestone, and a number of other Vermont luminaries. Although RIMS is, as a certain Presidential candidate would say, YUUuuuuge, its remarkable how many folks come around to the Vermont booth either wanting to learn more about captives or connecting with the team on a number of issues.  If you have a Vermont domiciled captive make sure you come on over and sign the RIMS Poster in the booth!

Our own Jim McIntyre will be moderating the captive insurance panel at 4:00 on Monday at RIMS. His panel is entitled Data Security and Breach Notification Legislative Update: What You Need to Know which will examine the federal government’s work to pass data security and breach legislation for consumer protection about to go into place. Jim will examine the legal ramifications for insurance companies.  Another panel included Mike Elliott, Senior Director of Knowledge Resources at The Institutes; and former VCIA Board Chair, Steve McElhiney, President of EWI Re, Inc. for a session entitled Using a Captive as a Risk Management Tool: A Case Study. Of course they are at the same time!

Changing gears, many of you might have seen the news the other day that Vermont’s Commissioner of Financial Regulation, Susan Donegan, is stepping down at the end of June. Susan is the “uber regulator” in Vermont and has been a true friend of the captive industry throughout her tenure. She supports the industry with the Governor, at the State House, and at the NAIC. Susan told me she didn’t have any immediate plans, but just wanted to enjoy a Vermont summer without all that work stuff to worry about. The Commish will be missed and we all wish her well in whatever new adventure she pursues!

Thank you very much, and I always look forward to hearing from you!

Rich Smith
VCIA President

Captive Bill in Final Stages of Passing (No Foolin’)

mrteeVermont’s General Assembly is going through the final stages of passing this year’s captive bill, H-538. I say “this year’s” because every year VCIA uses its member legislative survey results as a foundation to meet with leadership at Vermont’s captive management companies and captive attorneys in order to draft proposals for changes to Vermont’s captive statutes. With those proposals in hand, we meet with Vermont’s captive regulators to hammer out what will become the initial captive bill to be presented to the legislature.

We do this every year because we know it’s important. Why? First, the captive industry is always evolving, so we need to make sure Vermont’s laws keep pace. Second, giving Vermont’s legislators a bill every year to review, change and pass allows them to be engaged with the captive industry – a touchstone that cements their ownership of and responsibility to this very important industry to the State.

H-538 will address a number of issues, including the following:

  • Allow sponsored captives and association captives to file reports on a fiscal year-end. Many sponsored captives are only open to affiliates, and association captives are limited to members of the association; in those cases it is appropriate to allow the captive’s year to match the owner/insured’s.
  • Allow sponsored and industrial insured captives to enter dormant status. When we permit the company to enter a dormant status, we waive the premium tax and the company stays in Vermont, ready to be reactivated when and if the need arises.  The same logic was applied when we passed the dormant status last year: keep the company here rather than have it dissolve.
  • Protected cells operate as segregated accounts within an insurance company operated by a sponsor. Our focus in the past has always been on fortifying the walls of the cells so that cell participants are assured that their money is protected from the liabilities of other cells.  The bill will now allow the free movement of cells to a different sponsored captive or the conversion of cells into either an incorporated cell or a separate captive.
  • The legislature passed RRG governance standards last session. With a year of operation under our belts, some minor adjustments will be made to clarify the rules for easier implementation.

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

Mergers & Acquisitions (& You)

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A study by insurance investment management firm Conning & Co., reported in a recent article from Business Insurance, sees another big year of mergers and acquisitions in the world of insurance. How does this affect you, a member of our elite captive insurance industry?

According to the report, the volume of merger and acquisition activity in the insurance industry more than quadrupled in 2015, (from $43.8 billion to $194.9 billion in 2014), with additional major activity expected, particularly in the property/casualty sector.   Those are big numbers. Some of the increase was driven by several large transactions, including Ace Ltd. and Chubb Corp.’s deal, according to the report entitled: “Global Insurer Mergers & Acquisitions in 2015, The Big Bang”, but the report also stated there were some sectors facing strong external challenges, such as medical professional liability.

The healthcare transactions were motivated by a number of factors, including the Affordable Care Act. “Growth in government-subsidized programs, such as Medicaid and Medicare Advantage, accompanied by the retreat of traditional employer-based plans in favor of high-deductible plans and exchanges, generated pressure to acquire Medicaid and Medicare providers and build scale to generate efficiencies,” according to the report.  We have certainly seen the impact on healthcare captives in the same vein. Clearly, mergers and acquisitions will put continued pressure on the captive arena as both the traditional and larger captive community seek these same efficiencies. The report predicts continued M&A activity in the insurance world this year as well, so hold on to your hat (or captives).

And speaking of acquisitions, I want to take this opportunity to introduce our new part-time staffer here at VCIA, Dave Rapuano. Dave will assist with VCIA communications and webinar initiatives and is a recent graduate of Champlain College with a degree in Graphic Design and Digital Media. His skills and experience will be a wonderful asset to our great team – welcome Dave!

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

Who’s Afraid of the IRS Defining Insurance?

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I just got back from the annual CICA conference in Arizona this week and I know what you are thinking: nothing but a scam to get into the nice sunny weather. Well, maybe, but there was a lot of really good stuff as well.

One piece of news that there was much discussion over was the recent public letter ruling (PLR) by the IRS, which held that a captive it was reviewing was not an insurance company and failed to meet the requirements of Section 501(c)(15) to qualify as a tax-exempt entity. Now, as we all know, for many years there has been much consternation on how the IRS defines insurance for tax purposes, and maybe we should be happy that there now seems to be something a little more definitive from the service on this issue, even though the lawyers tell me that a PLR is not considered precedential.

Bruce Wright, partner in the Tax Department at the law firm of Sutherland Asbill & Brennan, as well as the recipient of this year’s CICA Distinguished Service Award, provided the overview. In brief, over a three year period the captive wrote a number of policies, participated in a pooling agreement, and assumed third-party reinsurance. Of particular interest is the ruling’s focus on whether the different types of coverages provided by the captive involve insurance risk. The ruling found only two of the coverages, weather-related business interruption and excess directors and officers liability, involve insurance risk. The IRS concluded that the other coverages involve only business or investment risk, not insurance risk.

The problem is that the IRS’s definition of what constitutes insurance risk versus business risk (whatever that is) and investment risk is all over the place. Some of the coverages the IRS disallowed included Product Recall, Excess Pollution Liability, Loss of Major Customer, Excess Intellectual Property, Excess Employment Practices Liability, Excess Cyber Risk, and Loss of Services of Key Employee.

I can see that some of the coverages might have validity for exclusion, like the Excess Cyber coverage focused on purchasing security upgrades that should have been a part of the company’s regular business operations. However, the majority make sense as insurance and include many coverages we see in captives on a regular basis! Furthermore, Bruce reported that in reaching its conclusion the organization is not an insurance company for federal tax purposes, the ruling does not appear to take into account recent Tax Court cases that address the insurance risk and risk distribution issues.

The fact that the IRS’ lack of consistency in its treatment of captives is no surprise; the lack of gray matter being put to its rulings is puzzling to me, if not to many of you in the world of tax!

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

Coming Soon: Cyber Ratings?

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According to a recent report in CFO.com, a new generation of cyber ratings firms are becoming known for rating a company’s cyber hygiene in much the same way that Moody’s and S&P set the standard by which we understand a company’s creditworthiness, or Fitch and A.M. Best test insurance companies.

New cyber ratings firms size up companies like a hacker would on a continuous basis, in a non-invasive way. They offer a numerical, FICO-like rating or a letter grade, much like the credit rating agencies employ. Performance levels for any of these factors can instantly raise or lower a rating. Bringing cybersecurity into the vendor risk discussion requires a cross-functional effort that typically involves finance, operations, procurement, and now IT.

Cyber rating data, and the reports that can drill down on all the factors, allows underwriters the ability to make decisions based on objective, real-time data, and rewards more secure clients by charging lower premiums. By “owning” this risk more closely through a captive, those responsible for cybersecurity will be more effective in justifying necessary technology expenditures and changes in organizational behavior that can improve their condition. As the report states, when these ratings become more visible in the marketplace, companies that have invested in security will enjoy a competitive advantage over their less cyber-hygienic peers.

I am heading out this weekend to attend the CICA annual conference in Scottsdale, so I hope to see a number of you out there. Dennis Harwick always puts on a good show, and it is a great opportunity to talk to industry leaders and hear what’s happening in our dynamic space.

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

The Dirty Dozen Rides Again

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By now most have probably heard that 831(b) captive insurers have, for the second year in a row, ended up on the latest IRS annual Dirty Dozen list of “tax scams”, even with recent legislative changes passed at the end of last year in the tax extenders bill by Congress.

The changes to the program, that included raising the maximum tax-deductible annual premium contribution to $2.2 million and imposing new limits on how much in 831(b) written premiums can come from any one policyholder, take effect in 2017; one reason, I presume, 831(b)s remain on the list. Through the end of 2016, parents of 831(b) captives can still make up to $1.2 million in tax-deductible premium contributions to the captives each year, and such captives’ underwriting income is exempt from federal taxes.

However, in their news release, the IRS said premiums paid by 831(b) captive owners may be double or triple the premiums the owners were paying for the same coverage purchased from commercial insurers, or the owners may pay premiums to the captives for “esoteric, implausible risks.” The motive, the IRS said, for such underwriting practices: maximum policyholders-owners’ tax deductions to reduce their taxable incomes.

With a declaration that “underwriting and actuarial substantiation for the insurance premiums are either absent or illusory” it seems pretty clear that the IRS will not be mollified by changes in the law alone!! Sometimes there’s just no pleasing people.

On a happier note, THANK YOU to all who showed up at our Road Show in New York City this week. With over 100 attendees and a great panel including Bob Cerutti of Tyco, Michaele DeHart from Syracuse University and Mike Serricchio from Marsh, it was a super event and another example of VCIA’s efforts to “preach the gospel of captives!”