Washington State News

Rubber stamp "TAX"You have probably already heard of the recent pronouncement by the Office of the Insurance Commissioner in Washington State “allowing captive insurance companies that have unlawfully insured any risk in Washington State in the past 15 years to pay a substantially reduced fine and premium tax penalty for self-reporting the activity.”

The fact that the Washington State believes they can basically outlaw captive insurance with a press release is disturbing at best. It contradicts established federal law on insurance and creates a direct threat to the industry for those organizations that have risks in the state covered with a captive.  In the original legal filing by the K&L Gates law firm on the Microsoft case, they laid out the comprehensive argument that (1) the Office of the Insurance Commissioner (OIC) does not have the authority to regulate self-insurance; (2) the captive was not in the business of making contracts of insurance and therefore excluded from the definition of “insurer”; (3) the captive is outside the scope of the OIC’s authority under the federal McCarran-Ferguson Act litigated under Todd Shipyards; and (4) the OIC was outside its bounds to try and tax premiums related to risks outside the State of Washington.

VCIA is working with CICA and our other captive insurance partners on a cohesive response to the bulletin. In the meantime, I would advise captives with Washington State presence to check with their captive advisors on the issue.  We strongly urge you to give it some time before deciding to comply with the release.

I look forwarded to hearing from you!

Welcome, Ian


Ian Davis, Director of Financial Services, State of Vermont

I hope you will all join me in welcoming Ian Davis as the next Director of Financial Services for the State of Vermont! The position is responsible for the marketing and business development for the State’s Captive Insurance Industry.  Ian has replaced Dan Towle, who moved on to become the new President of CICA recently.

Our staff and I have already been working with Ian over the past few weeks, and I can tell you he will be terrific! He’s bright, energetic, and a quick learner – already tackling a number of projects for the benefit of Vermont’s captive industry. We are all looking forward to working with Ian for many years to come – and all of us will be down in Philadelphia the week after next for the monster that is known as RIMS. For those of you that are going to be there come on by the Vermont booth and say “hi” and welcome Ian to the family!

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

School’s Back In!


jack-black-smith-2Just got back from a couple of conferences this week and it always gives me great perspective. First, I attended the Self Insurance Institute of America (SIIA) conference in Austin (cool city!) where the focus is primarily healthcare and workers comp. SIIA brings together all the self-insurance groups in these areas, but is seeing a growth in the captive arena as it pertains to stop-loss and workers comp.  VCIA’s Janice Valgoi, DFR’s Dave Provost, Primmer’s Jesse Crary and I did many hours of booth duty over the course of a couple days. We had a number of people come up to us and ask, “So what’s the State of Vermont doing here?”  After explaining Vermont’s role in the world of captives it became clear to them and they seemed eager to understand captive insurance as the next new marketplace, but it also became clear to me that it will be a lot easier for organizations that are already working in the captive space to add stop-loss or workers comp, than vice versa.

At the National Risk Retention Association (NRRA) conference in Chicago (another cool city!) later in the week, I participated on a panel that examined the Next Generation and diversity in the captive insurance industry. The cool thing was that there were a number of insurance students from some nearby colleges who were not shy about what they think the industry should do, including coming into the classrooms and doing a spiel on captives, as well as providing mentoring and internships.  I think one of the best lines about this came from our long-time friend, Michael Bemi. When addressing the issue about the perception that insurance is boring, he said in captives you aren’t selling insurance, you’re building insurance – has a nice ring to it, I would say!

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

What’s Up, Doc?


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

Coming Soon: Cyber Ratings?


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.

Coming at us in all directions!

arrows“Global Regulatory Change for the Re/Insurance Industry”. That was a title from a story in the Intelligent Insurer back in September and, especially for the captive insurance industry, it feels like the squeeze of one’s head in a vice.

The industry been in the crosshairs from a number of threats that I anticipate will continue to develop over the next few years:  (1) excessive regulation resulting from insufficient knowledge; (2) the weakening of sound regulatory structures based on a desire to attract business; and (3) efforts to impose new or increased taxes.  The change is that these threats usually emanated from Congress or the NAIC, but now we see them coming from other sources from individual states to the murky scene of international quasi-regulation. The International Association of Insurance Supervisors (IAIS) – yes another group that needs to show its regulatory muster – continues to work on a risk-based global Insurance Capital Standard (ICS) and it is creating Basic Capital Requirements (BCR) and Higher Loss Absorbency (HLA) requirements. VCIA recently submitted comments on a captive insurance regulatory white paper from the IAIS that exposed its overreach on regulation as well as inconsistencies in the regulatory framework suggested for captives. The NAIC has raised regulatory, legal, and accounting concerns associated with the ICS and does not want the standard to favor one regulatory approach over another. The NAIC also has its Own Risk and Solvency Assessment (ORSA) requirements and the U.S. federal government continues to increase its involvement in financial services regulation. Solvency II is another concern for insurers, as it takes effect at the start of 2016. Had enough jargon and acronyms yet?

The report from Guy Carpenter indicates that these evolving quantitative and qualitative reporting requirements may help regulators more effectively track and manage risk and reduce harm to policyholders; but it also could lead to overregulation and reduced competition in the form of higher premiums and fewer product options.  The good news is that captive crusaders, like Vermont’s Dave Provost, have been very effective in stemming the flow of these types of quasi-regulations. Still, I can feel the vice tightening ever so slowly…

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

Rich Smith
VCIA President

Je Suis Parisien

tumblr_mcu1vtp8mf1qmae8to1_500Too often we in the insurance world look at the numbers (read data) and create complicated algorithms and processes to wring out the best results in terms of insuring risks for our people and organizations. The events in Paris this past Friday remind us all too well of the human costs behind some of those grim statistics. Like many of you, I was horrified about the attacks in this beautiful city, but it also highlights the toll of terrorism in places we hear very little about: Raqqa, Aleppo, Darfur, Kano.

According to the latest annual Global Terrorism Index by the Institute for Economics and Peace in 2014, acts of terrorism have cost the world $52.9 billion, up from $51.51 billion following the 2001 terrorist attacks in New York. Included in the cost is the value of property damage and the cost of death and injury, but it does not include the costs associated with increasing security, higher insurance premiums, or the cost of city gridlock after an attack.  Obviously, the latest figures also do not include costs associated with the November 13 attacks in Paris, which will probably pale in comparison compared to the  13,426  total lives lost to terrorism in 2014 in the Middle East and Africa alone. Staggering.

On a more mundane matter, I am visiting Washington today for the fourth time this year to try and move the Leahy/Graham Captive Clarity bill. With my good friend Kevin Doherty from Tennessee, we will meet with senior staff of Senator Corker, a key member of the Banking Committee, in our continued effort to educate key leaders on the bill.

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

Rich Smith
VCIA President

Insurance to Celebrities


I was thinking the other day while watching a Tom Hanks film, “I wonder if he started out in the world of Insurance?”  OK, maybe I need a vacation or maybe the Heady Topper I was drinking went to my head a little faster than I thought, but Tom Hanks looks like the prototype insurance guy in a lot of his movies (think “Catch Me If You Can” or his newest, “Bridge of Spies”). So I did what we all do when we have to do some all-encompassing research on a topic: I googled it.

I didn’t necessarily think Brad Pitt, George Clooney or Bil Gates would pop up, and thankfully neither did any of the Kardashians (well, sort of), but I was a little surprised that there weren’t many names that I recognized from my “extensive” research. Here is the list of notable celebrities who started out in insurance:  Anne Rice, Tom Clancy, Colonel Sanders, and, wait for it, Caitlyn (formerly Bruce) Jenner.  Interesting group!  Clearly the world of insurance is keeping our captive stars engaged and happy, thus precluding them from becoming celebrities in some other obscure field, such as acting, writing and fried chicken.

VCIA has a number of captive celebrities participating in our next webinar on December 16. Captive Taxation: Trends and New Developments 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. These guys are the real deal. Go to www.vcia.com to register today!

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

Rich Smith
VCIA President


Brian Donovan of STICO

1136_happyretirementpartystreamersballoonGreat article in the Risk Retention Reporter on the impending retirement of Brian Donovan of STICO at the end of the summer this year. Brian formed STICO in Vermont in the late 80’s to deal with the difficulty of finding pollution insurance for steel tank manufacturers, and transformed it into an RRG in 2002. Brian served on the board of directors of VCIA and was a major force in the growth of the association over the years. His son, Colin, who has been with STICO since 1998, will assume Brian’s position on his retirement.

One of the interesting things Brian told me at this year’s CICA conference, and was also mentioned in the story, was the fact that he never started out to get into the insurance business (you can’t swing a dead cat in a meeting of insurance people without hitting someone with a similar story), but it has been quite a ride!  For those of you who know Colin, you know he will keep the same steady hand on the tiller during his tenure at the helm. And with his own brand of wry humor. Farewell, Brian – and good luck, Colin!

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

Richard Smith
VCIA President

Friday the 13th

Friday13thThe captive industry had a very interesting fire drill this week when, unbeknownst to almost everyone, the U.S. Senate committee on finance scheduled a hearing to walk through a few tax proposals, including proposed modifications to the 831(b) tax election for small insurances companies.

Under the title of DESCRIPTION OF THE CHAIRMAN’S MARK- RELATING TO MODIFICATIONS TO ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE COMPANIES, the Senate finance committee was about to proceed on what they deemed non-controversial tax bills. This provision would have increased the premium ceiling from $1.2M to $2.2M and indexed for inflation; disallowed the election if direct net written premium from a single policyholder exceeds 20% (single policyholder to include all members of the same controlled group); and disallowed assumption reinsurance.

This proposal would have all but killed the program for the captive insurance industry. Now, while I have for some time identified issues that I see as abuse of the 831(b) program by those looking to avoid tax as opposed to legitimate small insurance companies, it was a bit of shock to see this on what I would call part of an arcane Senate procedure.  Once the chair of the committee, Sen. Orrin Hatch of Utah, was made aware that this was especially galling to his home state’s captive industry, a new document came out the day of the hearing called the “Description of the Chairman’s Modifications to the Chairman’s Mark Proposal” removing the requirement that no more than 20 percent of its net written premiums be attributable to any one policyholder (along with the associated reporting requirement) and the prohibition on reinsurance.

Add on top of this the recent IRS press release about their “Dirty Dozen” tax schemes that highlighted the abuse with 831(b) captives, it behooves the captive insurance industry as a whole to pull together and offer a viable solution to this ongoing issue.  Let’s not wait for the next arcane procedure to catch us short!

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