At this time of year when the days become shorter and evenings bring a chill, the Green Mountain State turns into a colorful countryside of brilliant red, warm orange, vibrant yellow, deep vermilion, and subtle brown. Once again a season has turned and Vermont takes on a new appearance. This pastoral scenery dotted with red barns and working landscapes was once known as “The Beckoning Country” - and indeed the tourism industry flourished. But today, 20 years after the introduction of captive legislation, what was previously only “beckoning” has become nothing less than “captivating”.
Today, Vermont has matured and now enjoys the enviable position as the premiere US captive domicile and the world's third largest domicile. Currently, over 370 captives are actively writing all lines of insurance business, and captive licence number 475 was approved at the end of the summer. The service infrastructure that has developed to support captives has also matured over the past 20 years. With 15 approved captive management companies representing independent Vermont firms and satellites of global companies, and sophisticated legal, accounting, and banking and investment firms, the domicile can provide every service necessary to the proper care and feeding of captives.
In stepping back to analyze Vermont's success, it is important to point out the key partnerships that have been so integral to the growth of this complex and exciting industry. Not to over-do it with a pastoral metaphor, but let's consider each partner - industry, regulators and legislators - as one leg of the milking stool. Clearly, it wouldn't work without each side contributing its resources and energies.
Industry, in the organized form of the Vermont Captive Insurance Association (VCIA), has served an important role in identifying new initiatives that reflect the emerging needs and interests from within the captive marketplace. Since 1985 the VCIA has helped to establish Vermont as both a global leader and as one of the most desirable domiciles. And, through successful efforts to promote the general welfare of the captive insurance industry in Vermont, the VCIA itself has earned the national reputation of being a well-respected and highly effective trade association.
VCIA's mission, in part, strives to provide members with opportunities for education and information sharing, the most notable being its annual conference. Held each August, the VCIA annual conference is an event that has become internationally recognized as the pre-eminent captive forum, and consistently draws over 800 industry representatives including captive owners, managers and related service providers, and representatives of other domiciles and jurisdictions. Throughout the week, participants are treated to a selection of educational topics that suit a variety of interests and, when it's time to relax, networking opportunities to enhance their uniquely Vermont experience.
At both the state and federal levels, the VCIA mission also strives to maintain a favorable regulatory environment for the captive industry by lobbying and communicating on issues that affect the continued competitiveness of the industry. And it is here where another key partner has made its contributions best known.
The Vermont General Assembly, in a bold act of faith in 1981, made an early commitment to support the captive industry, which is particularly well suited to satisfy Vermont's desire that business development harmonize with the natural landscape. For a small state such as Vermont (population 560,000) the potential impact of the industry on the state's economy was expected to be significant. And, almost 20 years later, that hope has become a reality. In a 1998 economic impact study of Vermont's captive management companies conducted by the state's Department of Economic Development, the $11 million in fiscal benefits (that is, tax receipts, direct and indirect personal income) far outweigh the $500,000 in fiscal costs associated with administering and regulating the industry.
Because the industry is so significant to the state's economy, captives have enjoyed a consistently positive reception in the legislature. As conditions within the marketplace changed and demand for new types of captive business increased, legislators responded positively to the industry when it presented new ideas to further enhance opportunities for captives. By having industry and regulators work jointly on the development of initiatives, the legislature has ensured that all the key partners are involved from the ground up.
Clearly, the state has never been complacent in its attitude toward captives. An overview of Vermont's key legislative enhancements over the past ten years illustrates how pro-active and innovative the state has been to create new opportunities for growth of the domicile. Highlights include reduction in captive premium taxes; development of a reciprocal business form for captives; the introduction of controlled, unaffiliated business for single captives; development of the Vermont branch captives of alien captive insurance companies that are authorized to write ERISA-regulated employee benefit business; sponsored captives that allow for protected cell participants; authorization for captives to write annuity contracts; the modernization of Vermont's insurers investment act; and a demutualization or conversion law for mutual insurance companies.
These initiatives not only strengthen the domicile's attractiveness but also demonstrate once again the receptivity of regulators to make the process flexible, yet responsible and workable.
The third key partner, Vermont's captive regulatory department, is considered to be the best in the industry. With over 30 collective years of regulation among them, the leadership of this department brings credibility, insight and stability to the process. Captive Insurance Division director, Len Crouse, recently celebrated his tenth anniversary with the department. When Mr Crouse took the helm in 1990, Vermont had 200 licensed captives. Since that time, and with much credit to his constant stewardship, not only has the number of licensed captives doubled, but there have been many other major achievements as well.
Until quite recently, Vermont held claim as the only domicile with a separate captive regulatory department. That distinction no longer exists as other domiciles have come online; however, the breadth and depth of Vermont's department continues to distinguish it from other domiciles. With Mr Crouse's leadership the department has developed into a highly skilled and professional regulatory staff of 14 people; the department earned a hard-won and successful NAIC accreditation review in 1995 and, this fall, a successful re-accreditation examination; the industry has seen steady growth of 20-25 high quality captives annually; and the cultivation of a strong and positive rapport between industry, regulators and legislators.
When asked to explain the reasons for Vermont's success, perhaps the best perspectives on that question are the captive owners and industry representatives themselves. Certainly, like other domiciles, Vermont benefited from being in the right place at the right time when the insurance access and affordability crisis struck in the mid-1980s. However, Vermont's success and growth during the soft market is a testament to the deeper competitive advantages that are uniquely the state's own.
CSX Insurance Company, a single parent captive owned by CSX Corporation, has been licensed in Vermont since 1987 and has its offices in Burlington. According to Rick Hamilton, president and general manager, his satisfaction with the domicile is attributed to several reasons. “Vermont is a stable domicile. It was an early entrant into the captive market and has consistently shown an interest in the people and companies it serves. The state has reacted positively every time the industry has asked it to. And, despite the possibility of slightly lower taxes in other domiciles, we have a high degree of comfort here.”
Don Breakstone, senior vice president and general counsel for Attorneys' Liability Assurance Society Inc., RRG (ALAS), the nation's largest risk retention group, has a similar perspective. “It was because of the sophisticated captive act that we chose to domicile in Vermont in 1996. The open relationship between Vermont regulators and captives, and the excellent reputation of the Vermont Department were also important factors in our decision.”
Vermont's established, mature infrastructure combined with accessible decision-makers, responsive government and flexible regulation makes this domicile a first choice for many Fortune 100, 500, and 1000 companies not to mention the non-profit sector and, increasingly, the middle market companies as well. In looking ahead to the future, Vermont's captive landscape is very fertile and poised for growth. As indications point to a firming up of the market, particularly in property/casualty and workers' compensation lines, the industry is anticipating not only additional activity through existing captives but, also, an increase in new captive formations.
“We've maintained our pace of roughly 25 captives each year, and we will continue to do so mainly because of the things we do - and we do them well. We will maintain our dominant share of new formations,” says Mr Crouse. Vermont claims roughly 80% of the market share of onshore captive formations.
New activity is unfolding in several areas. Sponsored captives - Vermont's segregated cell vehicle - have been developing as anticipated. Since the law was enacted in May 1999, four new sponsored cell captives have been licensed. And the recent US Department of Labor (DOL) private letter ruling, which allows Columbia Energy to write employee benefits coverage through its Vermont branch captive, has also generated great interest from the industry. While DOL will still require a second private letter ruling before granting fast track approvals, many companies are beginning to assess the potential benefits of this new opportunity.
All in all, the Vermont domicile continues to demonstrate stability and strength - like its beautiful Green Mountains - yet is receptive to innovation and change, in order to anticipate the needs of a dynamic industry. Perhaps the most vocal supporter of the industry has best captured the attitude of all those key partners that support Vermont's captives. When asked recently about the state's role in supporting the industry, Governor Howard Dean, MD, said: “If we have to have a new law each year to keep ahead of the competition, then so be it.” What else would one expect a global leader to do, but lead?
Lisa Ventriss is president of the Vermont Captive Insurance Association.