When IHG Hotels & Resorts considers insurance coverage for its hotel-related risks across the world, it looks first to its Vermont-based captive.
Once a risk is in the captive, there’s little chance that it will ever be funded anywhere else. The firm always considers how an exposure might be covered in its Vermont insurer rather than in traditional markets. “We have very much a captive-first philosophy,” said Marc Bentley, IHG’s UK-based head of global risk finance.
“We do assess the market,” he continued, but it would be unusual for a predictable risk to be funded outside the captive. “There’s not a lot of benefit in dipping in and out of the market when you’ve got an expected level of loss,” he said. For more volatile exposures, “we would consider the market for potential solutions. But I can’t think of any time we’ve gone back into the market once we have a captive solution.”
That’s an approach that works well for IHG, according to Mat Robinson, senior managing director, captive operations leader at Brown & Brown RS Insurance Services in Colchester, Vermont, which has managed the single-parent captive since 2007. “Their willingness to consider how to make the captive work best for them is one of the things that makes them a great partner and provides the biggest benefit for IHG as a whole,” he said.
Taking root in Vermont
IHG’s Vermont captive was formed in 1990, as Holiday Inn Worldwide Insurance Co., to write coverage for Holiday Inn Corp.’s chain of hotels. The hotel chain was owned by IHG’s parent company, Bass PLC, which was renamed Six Continents PLC in 2000. Three years later Six Continents spun off its hotel operations into InterContinental Hotels Group, which assumed control of the captive that is now called the SCH Insurance Co.
As the captive has evolved, its owners never considered moving it from Vermont. When it was formed 35 years ago, a key consideration was the ability to write U.S. workers’ comp exposures, Bentley said. In Vermont, there were no restrictions on writing non-U.S. business. That still holds true, and with those advantages as well as a competent and responsive regulatory structure, it makes sense to remain in the domicile, he explained.
Until 2016, IHG was operating two captives besides SCH — one in Bermuda and another in Gibraltar. It was determined that the Bermuda captive, which was in runoff, and the Gibraltar captive that was writing non-U.S. risks, were not necessary. A feasibility study showed no good reason to operate three captives and the decision was made to handle all of the business in the Vermont insurer, Bentley explained.
“We never looked at any other state as an alternative,” Bentley said. “It was more a question of which option was best for us — whether it was domestic or international.” With a significant amount of IHG’s business in the U.S. and no restrictions on insuring risks abroad, the existing Vermont captive was the clear choice, he said.
SCH is one of more than 80 Vermont captives that are owned by parent companies based outside the U.S., according to Amber Walsh, captive insurance examiner with the Vermont Department of Financial Regulation. “And that is spread across 23 countries,” she said.
IHG has done a good job using the captive to take on risks the company is comfortable putting there. “And we do see other captives with international roots structured and operating in a similar way,” Walsh said.
Serving the brands
SCH has grown from its early days in Vermont to an insurer that now writes around $55 million in premiums on 19 lines of business, on both a reinsurance and direct basis.
Only around a dozen of more than 6,600 properties under the IHG umbrella are owned/leased by the company. Around 1,200 of the properties are owned by third parties and managed by IHG, and the remainder are franchise hotels.
“We’re obviously a hotel company,” Bentley said, “but we’re actually more of a brand and technology company, to be honest.” A big part of the business, for example, is to provide hotel reservation and marketing systems to the brands, he added.
The captive’s business is made up of “everything you would expect us to be writing,” he said, providing coverage for property/casualty, workers’ comp and other traditional exposures. SCH covers directors and officers liability and cyber risks, which can be difficult to obtain in the traditional market.
“We also write what you would consider non-traditional things that are very specific to IHG’s business model,” Bentley said. “For example, we have coverage for risks related to default of loans provided to third-party hotel owners. Those are things that are specific to us but still insurable.”
As a large portion of the captive’s business is written for hotels that are managed by IHG, a fronting arrangement is necessary for much of the coverage, Bentley said. In other cases, for risks specific to IHG, insurance is provided on a direct basis by SCH.
Spreading the risk
Bentley noted the captive’s diversified portfolio as a key strength that has proved its worth time and again. If an individual line of business suffers significant losses, he explained, the captive can soften the impact because it spreads its risk across multiple lines and has stoploss protection in place.
“We write business in the captive on a long-term strategy,” Bentley said. “We have nearly 20 lines of insurance that we write over a long period of time. That’s all part and parcel of having a diversified portfolio …We have the diversification of time as well as diversification of risk.”
SCH’S portfolio includes the not-so-simple business of funding benefits for around 35,000 IHG colleagues outside the U.S.
“Hugely complicated,” is how Bentley describes structuring benefit programs for employees in more than a hundred territories. But cost savings and control of programs that provide employees with meaningful benefits make it worth the work, he said.
“It’s not a simple process,” Robinson agreed. “It’s not a onesize-fits all approach by any stretch,” he said, but a structuring of benefit plans on a country-by-country basis.
While the captive is able to fund international employee benefit offerings, IHG is seeking an exemption from the Department of Labor that will allow SCH to do the same for its U.S. employees. The captive does provide medical stoploss insurance in the U.S.
Self-funding on a groupwide basis creates significant savings, even with administrative costs, Bentley said. “And it actually provides a greater level of benefits to our employees,” he added.
It creates flexibility that allows IHG to design programs that closely fit employees’ needs while providing cost savings to IHG, Robinson pointed out, which are significant reasons for taking on the task of self-funding benefits.
Exploring new coverage
While IHG doesn’t protect hotel properties owned by third parties as company assets, it is concerned about a loss of revenue that could be incurred if disaster struck. That’s especially true of properties located in windstorm- and earthquake-prone areas.
Coverage from the traditional market for loss of revenue caused by catastrophic events is either unavailable or very expensive, he said. And that could mean an opportunity for SCH to structure protection on a parametric basis to protect IHG’s income.
“There obviously is a risk to IHG if an event did occur” at a hotel that the company manages for a third-party owner, Bentley said. “So, we’re looking at parametric triggers” that could be used to trip coverage that would protect against loss of revenue from a catastrophe, he noted.
Revenue-per-available-room might be such a trigger, Bentley said. If that amount fell to a certain level, coverage could make up the shortfall.
“It’s a risk that IHG and all companies that have royalty and management fee streams as revenue face, but there’s a way that we can write that into the captive and we are considering our options,” Bentley said.
No end in sight
Vermont’s captive numbers grew by 41 in 2024, marking it among the 10 best growth years since the state enacted legislation 44 years ago allowing the creation of captives regulated by the state. That compares with 38 formed in 2023. Another 27 were created through mid-May of this year, signaling what appears to be another banner year for formations.
“It feels like there’s no end in sight,” Walsh said. “We are incredibly busy with our licensing activity … If things stay at this pace, we would be on track to have one of our highest years. We can’t predict the future, of course, but I just don’t see an end with these applications. We’re constantly having new-business meetings.”
Five captives writing real estate risks were formed last year and another three were on the books as of mid-May of this year. Construction and health care sectors are also driving demand for captive formations in Vermont. Companies in energy, finance, manufacturing, professional services, retail and transportation sectors are among those creating captives.
Many of the new formations are by middle-market companies, which appear to have become more captive-savvy in recent years, according to Walsh. She recalled that many of the conversations with such companies at an industry conference earlier this year were less educational than in the past and focused more on how to utilize the insurers.
Five new captives were formed in Vermont by international companies based in France, the UK and Mexico last year.
Regulatory approach stands out
Walsh said Vermont regulators’ long experience in overseeing captive formations and operations makes a difference for owners that need to establish a captive. “We’ve been in the game for a long time and because of that experience we’ve had the ability to build up a strong team with deep knowledge, along with the flexibility to adapt and learn new things,” she said. “For international companies, that can make a big difference when you’re trying to navigate regulations and set up something that’s a little bit out of the box.”
One of Vermont’s biggest draws, Walsh said, is its responsive and reasonable regulatory approach. “We’re not here to throw up roadblocks. We want to work with companies to figure out what makes sense for them while still maintaining a solid framework of regulatory oversight. This can be helpful for companies with international parents who may not be as familiar with the U.S. regulatory environment,” he said.
He also pointed to the domicile’s well-established support system of captive managers, legal experts and other service providers who understand the needs of international companies as among Vermont’s strengths.
Robinson agreed that Vermont’s regulatory approach to forming and managing captives is “top notch. They are the gold standard … They work with the captive managers and various service providers to help design a program that fits within the captive legislation and provides the biggest benefit to our clients.”
The domicile’s practice of using in-house examiners rather than outsourcing that work sets Vermont apart from other locations. “They have a large number of examiners; keeping them in-house and being able to properly train them allows them to better control examination costs, which can add up quickly,” Robinson said.
Walsh said keeping examinations in-house costs about half the amount that contract examiners charge. The department performs around a hundred examinations per year, and the process has been honed to make it as “efficient and painless as possible” while focusing on areas that need attention, she pointed out.
“I find them fantastic,” Bentley said of Vermont regulators. “They take a lot of time understanding our business model and it’s not an easy, straightforward business … We’re about as complicated as you can get and they have been hugely engaged.”
The often-repeated saying, “If you’ve seen one captive, you’ve only seen one captive,” is accurate, Bentley said, and Vermont regulators recognize that truism. “They don’t try and apply the same principles across the board. We’ve had nothing but positive experiences with them and long may that continue. We’re firmly of the position that we’re in the right place.”
