Go, Len!


Len Crouse, shown here during his time as Deputy Commissioner of Vermont Captive Insurance

It’s officially summer in Vermont and things are getting hot – and I’m not necessarily talking about the weather. As most of you know, VCIA is hosting the “World’s Best Captive Conference” this week in Burlington (and yes, I have trademarked that!) and I am sure you are all making plans to join us.

I wanted to take the opportunity to congratulate Vermont’s own Len Crouse for making Best’s Review list of Key Influencers! As most of you know, Len was head of Vermont’s captive division during the heady days of growth for the State’s captive industry. As the piece rightly points out, he helped set the “gold standard” for Vermont and the industry as a whole when it comes to captive regulation. Len joins luminaries such as Hank Greenberg, Brian Deperrault, and Ajit Jain of Berkshire Hathaway. Congratulations Len – well deserved! And don’t miss Len speaking at the VCIA conference on the panel Group Captives Take Center Stage.

Thank you all very much, and I look forward to hearing from you and seeing many of you this week!

Rich Smith
VCIA President


RIMS and the Commish…


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.

Who’s Afraid of the IRS Defining Insurance?

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.

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!”

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

Captive Day Under the Gold Dome


Every January VCIA hosts Legislative Day in Montpelier, Vermont, for our members to get close up to the folks who pass the laws and remind them how successful the captive industry has been to the State – not that Vermont’s legislators need reminding!

In an ever grim world of battered budgets and various crises, it’s nice when an industry can walk into the State House to just say “thank you” for the work our Representatives and Senators do to support our cause. Over 70 VCIA members from as far away as Oklahoma (thank you Heather McClure!) descend on the capitol to make contact. And what we hear back from the members of the General Assembly and Administration is “what can we do for you this session?”  I had one prominent senator come up to me and succinctly describe the issue of self-procurement taxes and their impact on captives! I find Legislative Day to be one of the most enjoyable captive events of the year and I think the members who are able to join would agree.

On another note, our sincerest congratulations to John Thompson who was just named to succeed Dan Labrie as the new President and Chief Executive Officer of Housing Authority Risk Retention Group, Inc.  HAI Group is a family of companies that serve the public and affordable housing community with special, niche insurance programs as well as other value-added products and services, and is a longstanding member of VCIA.  I have known John for some years now from his position as the director of captive insurance for the Connecticut Insurance Department. He is a great choice to take over from one of the giants in the captive world and I look forward to working even more closely with him going forward.

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

Rich Smith
VCIA President

Captives: America’s Pastime

A friend of mine gave me tickets to the Red Sox – Yankees game down in Fenway Park last week. Now normally those tickets would be next to impossible to get, but since the Sox were scraping the bottom of the standings there wasn’t quite the same hype for The Game as in years past. That being said, anytime you can get to Major League baseball’s holiest shrine is always fun – and the weather was great, hotdogs tasty and beer cold. What a night!

But as I was sipping my $8.00 can of beer, I couldn’t help reflect that MLB has a captive in Vermont (which delighted my 15 year-old to no end – yawn) and then slipped into what Dave Provost, Vermont’s Deputy Commissioner in charge of captives, does when he is travelling around the country: identifying all the companies and organizations you bump into that have captives in Vermont. Brushed my teeth with Crest in the morning, zipped up my jeans with a YKK zipper, checked the weather on CBS, closed my Marvin windows, got into my Toyota, buckled my seat belt made by Takata (maybe should double check those…), filled up at a Mobil station, and sipped my Starbucks on the way there… and I hadn’t even arrived in Boston yet! Next year, we’re going to Disney World!

Hope you can join us for our upcoming VCIA webinar: The Sweet Spot! Finding the Right Retention Level for Your Captive, on September 16.  Our expert speakers, including Google’s director of business risk and insurance, will share their thoughts and experiences on what to consider when determining how much risk to retain within your captive.

By the way, for all you Yankee fans out there, even though Sox pitcher Porcello pitched a good game Boston lost 3 – 1. Thanks and keep in touch!

A snapshot of the captive insurance industry

George Harrison with camerasI always look forward to the findings from the annual Marsh Captive Solutions Benchmarking Report, released this week for 2015. In it they benchmark more than 1,000 of their captives which gives a pretty good overview on the captive industry and trends going forward – including some nuggets.

A lot of their findings are not a surprise to those who track the industry, including the fact that small captives are the fastest growing segment which is more evidence that captives make sense for companies of all sizes.  I guess I might quibble with that conclusion in light of the potential abuse of the so-called 831(b) captives for non-insurance reasons. However, as the management of risk becomes more widely understood (and the expertise more available) I would agree that captives are truly for every enterprise – large and small.

OK, I have not read the report all the way through and plan to on my beach vacation next week (well, maybe after that), but here are a couple of other things highlighted in the report:

  • Use of captives for nontraditional risks such as political and cyber risk are growing substantially (more than 11.26% from 2013 to 2014). This is not such a surprise based on much of the discussion over the past year on these issues, but it is good to see the trend growing in this area.
  • Only a little more than one-in-five captives Marsh manages (374) are using captives to access federally subsidized terrorism coverage under the Terrorism Risk Insurance Program Reauthorization Act. Perhaps this has more to do with the relative risk to terrorism that most of our captive owners face (or feel they face). Probably not going to see a lot of coverage for TRIPPA from a captive that cover facilities nestled up to the Canadian border in Warroad, Minnesota (yes, there is a substantial company located there with a Vermont captive) but it bears looking into.
  • Only 47% of US owned captives actually achieve insurance tax status and deduct premiums paid to the captive. This may surprise those that think captives are just another “tax-dodge”.
  • Captive domiciles are flourishing in the European Union under Solvency II. Perhaps this fact will allay some of the fears of over-regulation of the captive insurance industry.
  • Emerging markets in Latin America, China, and the Middle East are further embracing the use of captives. Again, not so much of a surprise to those following the captive trade worldwide, but a great opportunity for all of us in the industry!

I couldn’t agree more with the overall conclusion from the report: more and more companies are finding having a captive is a strategically important corporate asset, as it raises the visibility of risk management costs and serves as an effective control tool.

I will be off next week on a family getaway so will not be able to keep you intrepid followers (you six know who you are) connected until later July.

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

Rich Smith
VCIA President