Vermont’s captive insurance industry is responding to competition and scrutiny with creativity: A proposal to establish a new “dormant” captive insurance license is likely headed to the House floor this week.
“Captive” insurance refers a business insuring itself through a subsidiary of its own, as opposed to the traditional mechanism of purchasing an insurance policy through a third party. A captive insurance firm might be licensed in a particular “domicile,” such as Vermont or Bermuda, but the company can actually be based anywhere.
Vermont is considered a leader in the field, behind only Bermuda and the Cayman Islands for the number of captive licenses issued. Gov. Peter Shumlin celebrated Vermont’s 1,000th captive license in October.
But that milestone belies a transitory reality in the captive market. Of the 1,000 licenses granted, only 590 were active as of Jan. 15, the day before the House Commerce Committee considered H.563 to establish dormant captive licenses.
The “dormant” license would be a way for captives to maintain registration in Vermont, even while putting its operations on hold. When they’re ready to get back into business, the captives could re-establish an active license in the state more easily than starting from scratch in Vermont — or somewhere else.
And there are plenty of other places to look. Since Vermont established its captive license in 1981, dozens of states have entered the market. Now Vermont is one of 30 or more.
The crowded playing field doesn’t just keep Vermont’s captive industry — including lawyers and financial specialists in the state who cater to Vermont-licensed captives — on its toes. It’s also prompted federal scrutiny.
In December, the Federal Insurance Office at the U.S. Department of the Treasury published a report that advocates for closer coordination among state insurance regulations, including those that shape captives. Should states fail to accomplish some reforms, the report suggests, federal regulators might step in.
State officials from the Department of Financial Regulation, as well as industry representatives from organizations such as the Vermont Captive Insurance Association, are keen to stay ahead of that curve. They told the House Commerce Committee they would even like to help other states step up to the plate.
David Angus, who chairs the VCIA’s legislative committee, said the report underscores “the importance for us to keep our eye on the ball.” As the federal guidelines help other states improve their regulatory structures, Vermont does not want to see its competitive edge disappear.
That said, some industry representatives and state regulators say it would behoove the state to ensure regulatory integrity marketwide. They fear that more lax states might approve licenses for firms that might not have sufficient reserves to smartly manage their own risks.
“If something ‘bad’ happens to a captive in another state, it hits the headlines and has an impact on the whole industry,” VCIA board chair Bill Reilly said.
Reilly said the VCIA is developing a tool to track regulatory changes in other states. Angus said regulations are in “pretty good shape,” but should look to update its credit reinsurance and principle-based reserving soon.
Meanwhile, the dormant license proposal likely will head to the House soon. It would require dormant captives to renew their dormant registration every five years, file annual financial reports and maintain at least $25,000 in capital and surplus. The firms would have to then apply to come out of dormancy before starting to issue insurance policies again.
House Commerce Committee Chair Bill Botzow said he expects smooth passage in the House. But he doesn’t want legislators, regulators or industry professionals to grow complacent in the glow of the state’s captive insurance success.
“What our expectation of the industry is, is to be innovative and flexible but also prudent,” Botzow said. He encouraged “as many eyes as possible” to examine the industry as it grows and adapts to increasing competition.
