Go, Len!

len2

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: remember it’s not a sprint, it’s a marathon…

rimsgroup

Just got back from the insurance marathon, better known as the RIMS conference.  This above is the advice Dan Towle, Director of Financial Services for the State of Vermont, gives all of us who attend and work at the Vermont both. Indeed he is correct – I needed to put my feet up for two days after!  And it can be dangerous: we had to dodge the opening night fireworks when a malfunction sent the projectiles into the audience!

Four days in San Diego doesn’t sound like a hardship, does it? And especially when you have so many great people working with you over the course of the event. Besides Dan, there were a number of folks from the Department of Financial Regulation, including Dave Provost, Sandy Bigglestone, Dan Petterson, Jonathan Spencer (what is that story about a rabbit attacking you again?) and Stacy Alden.  Some of our members staffing the cause were Steve Killoran from Maple Capital, Chris Turley from TD Bank, Bob Gagliardi from AIG Insurance Management Services, and Pete Kranz from Beecher Carlson. Include me, Janice Valgoi from VCIA and the intrepid Maddie Moninghoff from Skillet Design & Marketing and every angle was covered.

RIMS is fun, but also a great way to meet our members who attend and talk to the many folks who are considering a captive. Even though over 10,000 people attend RIMS, Vermont stands out as the place to go to cover captives. Great work everyone!

Thank you all 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.

The Dirty Dozen Rides Again

blogdirtydozen

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]

richasakidfinal

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

The Numbers Are In!

powerball hostCongratulations to the State of Vermont on licensing 33 new captives in the State in 2015!  The list is made up of 12 pure captives, 7 Risk Retention Groups (RRGs), 7 sponsored captives, 4 special purpose financial insurers, 2 industrial insured captives, and 1 association captive.  Growth in 2015 was up significantly from 2014 when 16 companies were licensed.  This growth is impressive especially when considering the prolonged soft market and added competition by other U.S. states.

What I thought was really impressive was that there were 11 ‘redomestications’, which is when an existing captive moves from another captive domicile to Vermont.  That is the largest number ever to occur in a single year in Vermont. The redomestications came from the following jurisdictions: South Carolina (3), Arizona (3), Bermuda (2), Cayman Islands, Nevada, and Kentucky.  This has more to do with Vermont providing a firm, fair, efficient and consistent regulatory environment than anything else.

Seven new RRGs were licensed in Vermont, bringing the active total to 89.  Vermont continues to hold a dominant market share with over 60% of all RRGs premium volume being written by Vermont companies.  Six of the 11 redomestications to Vermont were by Risk Retention Groups.  New captives were licensed in insurance, healthcare, construction, real estate, professional services, education, transportation, agriculture, retail, and other.

Besides the newly licensed captives in healthcare, notable captives in the class of 2015 include PricewaterhouseCoopers LLP; Syracuse University; Cummins, Inc.; Marubeni Corporation; Willis Management (Vermont), Ltd.; National Life Insurance Company; Wilbur-Ellis Company; Zurich Insurance Group; and 17 Universities/Colleges.

2015’s new licensees bring Vermont’s overall total licenses to 1062 with 588 active captive insurance companies. Compared to Cayman (22), Bermuda (22), South Carolina (21), Vermont’s 33 is proof there is no place like it for captives. One day we will rule the world (did I say that out loud?)…

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

Rich Smith
VCIA President