Business & Economy

Vermont establishes nation’s first legacy insurance structure

Department of Financial Regulation Commissioner Susan Donegan (left foreground) speaks with Gov. Peter Shumlin (right foreground) at the bill-signing ceremony for Vermont's Legacy Insurance Management Act. Reps. Warren Kitzmiller, D-Montpelier, and Mike Marcotte, R/D-Newport, also join. Photo by Hilary Niles/
Department of Financial Regulation Commissioner Susan Donegan (left foreground) speaks with Gov. Peter Shumlin at the bill-signing ceremony for Vermont’s Legacy Insurance Management Act. Reps. Warren Kitzmiller, D-Montpelier, and Mike Marcotte, R/D-Newport, also join. Photo by Hilary Niles/VTDigger

Gov. Peter Shumlin signed a new “legacy insurance” industry bill Wednesday that could pump millions of dollars into state coffers.

Shumlin called the Legacy Insurance Management Act, or LIMA, an “innovative insurance product that is needed in America.” House bill 198, three years in the making, allows insurance companies to unload blocks of policies they’re no longer selling, but which still hold liabilities.

Policymakers say Vermont’s LIMA is the first of its kind in the U.S., though it’s modeled after similar products in Europe. The option to unload legacy policies is not available for retail insurance lines such as auto or life insurance.

Only commercial insurance lines that are not otherwise regulated by the state can be transferred to a legacy firm. For example, policies covering logging operations or an asbestos mine such as the now-closed operation on Belvidere Mountain in Eden, which typically carry too much risk to be absorbed into the domestic insurance market, could be transferred to a legacy company.

Here’s how it works: The purchaser, or legacy insurance company, makes a bet that it can manage the legacy liabilities more efficiently than the original insurance company. It buys the block of policies, along with a good portion of the financial reserves the insurance company had set aside to cover those policies’ risks. Then the legacy firm manages any claims that might come through, and invests the reserves — within regulatory limits — to turn a profit.

“A lot of them will be investment companies, not insurance companies,” says Anna Petropoulos, who’s started the firm Apetrop USA in Brattleboro to service the legacy insurance companies she expects will establish themselves in Vermont.

She says the legacy firm can be more efficient than an active insurance company because the legacy firm specializes in high-risk pools.

“It’s like a surgeon,” Petropoulos says. “You don’t need him daily, but you need him when you need him.” The legacy firm with a roster of high-risk pools can keep the “surgeon” busy every day.

Petropoulos had a hand in crafting Vermont’s LIMA legislation, along with Jeff Lewis, retired executive director of the Brattleboro Development Credit Corp. and a founding partner of the advocacy group Campaign for Vermont.

Petropoulos and Lewis approached Susan Donegan, commissioner of the Department of Financial Regulation, to suggest Vermont pioneer the legacy insurance industry in the U.S. Donegan’s department oversees the banking, securities and insurance industries in Vermont, and recently built up a team of staff to specialize in LIMA regulation.

Many insurance industry professionals resisted the legislation, but Donegan said she was confident from seeing legacy insurance take shape in Europe that a similar mechanism would be possible here.

Technically, legacy transfers can already take place, she said. But the process can drag on for up to two years. The new mechanism created by the state’s LIMA will streamline that to a matter of three or four months.

Donegan said at the bill-signing that one of her goals is to establish Vermont as “a destination for financial services.” The state’s strategy with LIMA is to mirror Vermont’s success with the “captive” insurance industry, another highly specialized insurance product.

In the captive arena, companies essentially form subsidiaries to insure their own lines of business. Vermont leads the global captive market, having issued almost as many captive licenses as Bermuda and the Cayman Islands.

In both the legacy and captive realms, the benefit to Vermont comes from direct tax revenue and job creation from associated professional services. Both industries involve complex regulatory schemes that can require teams of lawyers and financial experts to navigate.

Both industries also are global in nature, though Vermont-licensed companies themselves must be technically “domiciled” in Vermont. The professionals that keep the firms humming, in turn, often are stationed within state lines for close access to regulators and lawmakers. Both legacy and captive insurance companies are required to hold at least one meeting per year in the state, as well, to drive tourism.

Legacy insurance taxes stand to generate substantial revenue, given the high value of individual sales. When a legacy firm purchases a closed block of policies from a traditional insurer, the transaction is taxed at 1 percent up to the first $100 million of value, and at 0.5 percent thereafter.

With individual transfers easily reaching $80 million, Donegan said at the bill signing, that’s fast money for the state’s General Fund.

But she doesn’t expect the revenue to pile up right away.

“If we get one transaction this year, I’ll be happy,” Donegan said.

Her department will craft regulations for the new industry in response to the needs of businesses that show interest.

“From a regulatory point of view, I don’t care what the deal is,” Donegan said in an interview after the bill-signing. “We care if the new Vermont company is properly capitalized.”

If you read us, please support us.

Comment Policy requires that all commenters identify themselves by their authentic first and last names. Initials, pseudonyms or screen names are not permissible.

No personal harrassment, abuse, or hate speech is permitted. Comments should be 1000 characters or fewer.

We moderate every comment. Please go to our FAQ for the full policy.

Hilary Niles

Recent Stories

Thanks for reporting an error with the story, "Vermont establishes nation’s first legacy insurance structure"