Coming Soon: Cyber Ratings?


According to a recent report in, 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


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!”


Bloomberg reported the other day that multiple women in the C-Suite boost a company’s profits – not really a surprise to us guys who have come up through the ranks of organizations run by women.

According to the report, a study by the Peterson Institute for International Economics and EY found that companies with at least 30% women in leadership roles may boost their net profit margins by about 15% compared to those with no female leaders. They found the biggest gains took place when women held senior executive positions, such as CFO or COO.

Industry leader Brian Duperreault, former president and CEO of Marsh & McLennan Cos. Inc., has been focused on this issue in the insurance industry for some time now. Despite recent, modest indications of progress, much work remains to be done in promoting diversity within the industry, particularly among its senior ranks. While the number of Fortune 500 companies led by female chief executives has tripled in the last decade, they still account for less than 5% of the total group. And according to Brian, in the insurance industry the figures are even worse: just 1.3% of CEOs in finance and insurance are women.

Perhaps the captive insurance industry has a better record of women in leadership positions. I am proud that five out of eleven of VCIA’s board of directors are women: Diane Hanson of Aon, Siri Gadbois of College Insurance, Heather McClure of Academic Physicians Insurance Company, Jan Klodowski of Agrisurance, and Maureen Raeside of Verizon Risk Management are all stars or rising stars in the world of captive insurance. Not to mention, as many of you know, VCIA’s own “C-Suite” is almost entirely made up of women!

I continue to see extremely talented young women join the ranks of captive insurance. However, much of the responsibility for effecting meaningful progress toward greater equality between male and female professionals within a corporate culture will fall to the most senior executives. Being such a data-driven industry, one hopes the Peterson Institute/EY study will help make a difference.

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

Rich Smith,
VCIA President

Bern Notice

bernieandrichfWhile not predicting any outcomes to a more than interesting political season, I must admit to a certain (yes, unrealistic!) fantasy should a Vermonter rise to the top. Clearly I have neither asked for a position in the administration nor have I been offered one, but since there are only so many people who live in Vermont, my resume would have to bubble up eventually, right?? And Bernie actually knows something about captive insurance and has been supportive of the industry here in Vermont for many, many years. So the possibilities are endless! Who knows….Secretary of State? Director of the Federal Insurance Office? One can dream.

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

Rich Smith
VCIA President

Disruptor (dis·rup′tor) n. [from Latin disrumpere, disrupt-, to break apart]


A force that can 1) throw into confusion or disorder; 2) interrupt or impede the progress of; 3) break apart or alter so as to prevent normal or expected functioning.

Disruptors are in vogue these days, especially when it comes to technology (think Amazon v. bricks-and-mortar). Captives were a disruptor to the traditional insurance industry when they broke onto the scene over 50 years ago, and even today, because of the flexibility and innovative nature of captives, they still are a disruptive force. But we are also seeing disruptors emerge in the traditional insurance industry in the past few years which I think may have an effect on the captive industry.

A recent KPMG survey reported that while insurance executives overwhelmingly know that innovation will drive future competitive advantage and growth, most seem to be struggling to ignite innovation within their own organizations. According to the report, “rapid innovation has created significant challenges for insurers, with 48 percent saying that their organizations are already experiencing disruption from new, more nimble competitors”. More than three-quarters said they are “already running just to keep up with their day-to-day requirements” and slightly fewer said they “lack the internal core skills needed to drive innovation”. But change is coming.

One interesting disruptor is the use of algorithms to aggregate small insurance policies in a way that prices some of the traditional companies out of the market, especially smaller enterprises looking for easy, quick and cheap. This commoditization pushes traditional insurance companies and agents to put more focus on larger business and specialized accounts – areas that should be ripe for the captive industry. Combine this with the growing use of technology and social media, such as Google Compare, and it can look daunting. But that’s what makes captives more alluring that ever. While businesses will still have concerns about coverage gaps in these types of programs, not to mention the fact that the specific needs of individual enterprises may not be available, the lack of personal accountability with these products would make any captive manager or TPA look like a hero!

This is where captives could excel. For instance, sponsored cell captive insurance companies provide the sponsor of the captive program a great deal of flexibility by allowing for individual cells that can be customized to each participant. This type of structure is growing in popularity because of the options and customization it provides. It can also be a good way for smaller companies to access the captive insurance marketplace, because typically the startup cost is less than establishing their own captive.

So keep the disruption coming! What doesn’t kill you makes you stronger…

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

Rich Smith
VCIA President

Testing 1-2-3

numbersCounting captives has been more of an “art” than science since the beginnings of the industry. The industry standard, if one can call it that, has been to count the number of licenses a particular domicile has issued over the years, and not so much as the number of captives currently active. For instance, Vermont has licensed over a thousand captives, but has just under 600 active captives currently. We all usually acknowledge this system as we compare ourselves with each other. Fair enough. So I was a little surprised to see Delaware announcing that they have licensed their 1000 captive this year. I don’t usually want to immerse myself in the business of other domiciles, but I had to ask what the hell is Delaware counting?

In press statements, Delaware reports that in 2009 they were home to only 38 captive insurance companies.  So presumably over the past six years they effectively added 962 captives – a mind blowing increase of 2500% if I did my math correctly. Really?

Since none of the reports explain how Delaware got to their 1000 number, I hate to hazard a guess on what they counted. Having watched a couple of the Presidential debates lately, I am beginning to worry that it’s too easy to throw “data” out there and then blame those that question it. It’s a little like Russian President Putin saying “we have no troops in Crimea” – OK maybe I am a little off the rails here. Perhaps it’s time for a call for sanity in the numbers game. I don’t expect we need an “official scorekeeper” but maybe just a little common sense.

Don’t forget to register for our next webinar on December 16. Captive Taxation: Trends and New Developments Webinar will include captive stars Tom Jones, Partner at McDermott Will & Emery, Chaz Lavelle, Partner at Bingham Greenebaum Doll, Dan Kusaila, Tax Partner at Crowe Horwath, and Art Koritzinsky, Managing Director at Marsh USA. Go to to register today!

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

Rich Smith
VCIA President

Vote for Captives!


clinton_trump2Now I know we Vermonters are always touting the support the captive insurance industry has received from the Governor, the Legislature and other State officials for the past 30-plus years (which is true to all of you eye-rollers!), but I think this is the first time I have seen captives as a campaign issue by one of the candidates.

Randy Brock, a Republican candidate for Governor of the State of Vermont in 2016, served as Vermont’s 28th State Auditor and currently is in his second term as a member of the Vermont State Senate. Brock says “That’s a great opportunity to think about what we do in the trust business to create a regulatory environment that’s particularly attractive, fast-moving and advanced — just the same way we did with captive insurance.  Vermont now dominates that niche segment of the corporate insurance industry, thanks to a concerted effort in the 1970’s to adopt legislation to lure captives to the state. Hundreds are now based here.”

OK, admittedly he is talking about captives as example of growing another services industry in the state, and I won’t comment on either the candidate or his specific idea (we are, after all, a 501(c)3.76483-A). But I do think it is illustrative of the knowledge and support of our industry in the Green Mountain State by those seeking higher office. Now if I can only get Donald Trump and Hillary Clinton to work captives into their speeches…

Hope to see you next week in Chicago for one of VCIA’s world-famous Road Shows on October 13th. Go to for more information – hope you can join us. Thanks and keep in touch!

Rich Smith
VCIA President

Growing importance or irrelevant? Don’t be confused!


I just read an article quoting one of the insurance industry’s leaders on the battle of the industry to remain relevant because it is being overlooked by some of the biggest firms and sectors.  His argument is that of the five largest companies in the world by market capitalization, three of them are technology firms while one is an oil and gas business.  He warned that these larger and more diversified companies are becoming less needy of insurance and these were two industries “where we are increasingly less present”.

Now, juxtapose that with many in the risk management arena reporting on the growing importance of this sector in the C-suite of most companies and corporations, including the evolution of the CRO or chief risk officer as I discussed in my blog from last July. Clearly risk management has taken on a new focus, so one might wonder why the insurance industry feels less relevant.

Let’s not get confused here! Enterprises of all types and sizes are taking risk management more seriously; but many are using alternative risk transfers instead of traditional insurance models, and that includes the technology and energy sectors especially. With available capital and new risk management techniques and models, these organizations are not “uninsured” as was implied – they are just bringing risk management in-house by using alternative structures like captive insurance. Captives bring control and efficiency to enterprises of all types while remaining extremely flexible and innovative. But while the traditional insurance industry, of course, will still have a major role in risk management, I think they are beginning to take notice of their upstart siblings.

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

Rich Smith
VCIA President

Calling all brokers…


Insurance brokers are an important function in the world of risk management. They facilitate the placement and purchase of insurance, and provide services to insurance companies and consumers that complement the insurance placement process. Insurance brokers typically work for the policyholder in the insurance process and act independently in relation to insurers. Brokers assist clients in the choice of their insurance by presenting them with alternatives in terms of insurers and products.

Insurance intermediaries can bring innovative marketing practices to the insurance marketplace. This deepens and broadens insurance markets by increasing consumers’ awareness of the protections offered by insurance of all kinds, their awareness of the multitude of insurance options, and their understanding as to how to purchase the insurance they need.  Captive insurance should no longer be seen through the lens of brokers as competition or some sort of exotic instrument. By addressing the broader needs of their clients, brokers should embrace captives as one of many tools they can provide their clients when establishing their insurance needs.  Indeed, many insurance arrangements today consist of layers in traditional insurance products along with captive insurance.

It is incumbent on the captive insurance industry to educate and work with brokers in all regions. We at VCIA are looking for ways to get this message across and better access the broker network to try and dispel the notion that captives can’t be a key tool for them and their clients.  We need to be seen as part of their solution for the client’s insurance needs and not as competition. I would love to get your thoughts and ideas on this.

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


Oh, the weather outside was frightful…

mixer photo 5

mixer photo 10

Yes, VCIA did host our annual holiday mixer Wednesday night in Burlington as a Nor’easter was raging outside. But it did not stop the many intrepid members from the captive insurance industry from joining us for great food, libations and conversations. Special thanks to Saslow Lufkin & Buggy, LLP for sponsoring the mixer. It was great to catch up with so many friends who too often I only see in passing at other captive events and meetings around the country… and to have nothing on the agenda other than to have a good time.

Of course having just said that, it is also an excellent opportunity for me to check in with our members and get a take on the industry as we near year-end, highly unscientific as it may be. And although the year was not without its challenges to the industry as a whole, our members are happy with where things stand.

On the emerging TRIA reauthorization front, the House of Representatives passed a bill on Wednesday to reauthorize the program but the bill may still face opposition in the Senate. Besides the changes negotiated by House and Senate leaders we reported on earlier, the bill originally contained provisions to modify the Dodd-Frank Act by incorporating a rule which will relieve insurers of capital standards regulations that originally targeted banks (the Collins Amendment). The White House had said that while it supported TRIA, it was opposed to the changes to Dodd-Frank being sought by Republicans.  Ultimately, the Collins Amendment was not included in the TRIA reauthorization bill approved by the House, however, in a separate action it passed through unanimous consent S. 2270, a bill that was passed by the Senate in June.  However, Sen. Tom Coburn (R-OK) says he’ll delay the bill unless the Senate would agree to his state opt-out amendment to NARAB II. The House has apparently gone home so don’t know if any amendments to House passed bill can be accepted. We will keep you posted as TRIA continues down the tortuous path to reauthorization (I hope)!

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