We sat down with Sandy Bigglestone, Vermont’s Director of Captive Insurance, to get her take on what lies ahead for the captive insurance industry in the upcoming year.
YOU WERE RECENTLY RECOGNIZED BY BUSINESS INSURANCE MAGAZINE AS A ‘WOMEN TO WATCH’ FOR YOUR LEADERSHIP, EXPERTISE AND ACCOMPLISHMENTS IN THE CAPTIVE INDUSTRY – CAN YOU TELL US ABOUT YOUR EXPERIENCE AT THE WOMEN TO WATCH AWARDS?
In December I was honored to attend the Business Insurance Women to Watch Awards and Leadership Conference in New York, NY, where I had the opportunity to network with the 2018 award recipients, past recipients, and other attendees. For years, I have admired the women who were named to the annual Women to Watch list, so it goes without saying that it is an incredible honor to be recognized for my dedication and contributions to Vermont’s captive insurance industry. There were approximately 600 attendees and I was both overwhelmed and inspired by the experience. Leaving New York, I resolved to pay it forward as best I can. Reflecting on my regulatory career, I was not alone in my success. It is through years of developing strong support, and a network of positive relationships, both personally and professionally, that I can celebrate this Women to Watch achievement.
WHAT WAS 2018 LIKE FOR VERMONT’S CAPTIVE INSURANCE INDUSTRY?
2018 was another good year for captive formations in Vermont. We licensed 25 companies, which is positive given the continuation of the soft insurance market cycle and is in line with our average of 25-30 licenses per year. Most 2018 formations were for single parent, or pure captives, but we had formation activity for every type of Vermont captive except for associations and agency captives. The leading industry sectors for new captive in 2018 were healthcare, insurance, retail, and manufacturing. Six of the new Vermont licenses represented re-domestications of existing captive insurance companies from other domiciles.
Three new formations were for sponsored, or segregated cell captives, and we are continuing to experience significant growth in cell formations. In 2018, approximately 100 cells were approved to be added to sponsored captives.
In terms of dormancies and dissolutions, we had ten companies take advantage of the dormancy statute and several mortgage guaranty captives went away after a period of runoff activity. Other dissolutions were the result of restructuring or acquisition at the parent level and consolidation of captive programs.
Perhaps most noteworthy, Vermont licensed its first Affiliated Reinsurance Company (ARC) at the end of 2018. This came after new legislation was signed into law in May of last year allowing for the licensing of ARCs. The timing was important for Vermont to establish itself as a U.S. alternative to insurance companies affected by the 2018 imposition of the Base Erosion Anti-Abuse Tax (BEAT) on reinsurance ceded to non-U.S. affiliates. ARCs will be subject to many of the laws and regulations under the National Association of Insurance Commissioners (NAIC) accreditation standards but are licensed and regulated by the Vermont Captive Insurance Division. The ARC solution stands out as one more example of Vermont’s agility and ability to address reasonable needs and provide alternative solutions. Vermont’s experience and reputation for quality regulation should offer some attraction for companies needing a more favorable domestic alternative to offshore reinsurance affiliates.
WHAT DO YOU EXPECT FOR THE UPCOMING YEAR IN TERMS OF NEW CAPTIVE LEGISLATION AND OTHER ACTIVITIES?
Each year, legislation is introduced to clarify, or create laws for captive insurance. The Vermont Department of Financial Regulation (DFR) intends to stay on the cutting edge of alternative insurance solutions, while sustaining the gold standard for which we have relied upon for nearly 40 years. Annually, the Captive Division works with the Vermont Captive Insurance Association (VCIA) and other interested parties to develop legislation that meets the needs of industry regulators. For the 2019 legislative session, there are some housekeeping-type changes drafted to clarify and streamline the statute language. I’ll highlight a few changes that are part of the draft proposal:
- Amendment to the examination requirement to “not less frequently than once every five years”
- Amendment to the investment requirements to allow Risk Retention Groups (RRGs) to file an investment plan for regulatory approval. The plan must address diversity in type and issuer of investment and provide for sufficient liquidity for solvent operations consistent with the NAIC accreditation requirements.
- Restructuring of the “Independent director” statute section for RRGs to allow for a better interpretation of independence and alignment with regulatory principals.
- And more that will be revealed later.
In addition to our regulatory enhancements, the Captive Division has been focusing efforts on improving processes, bettering communications and developing guidance to supplement laws and regulations. The Vermont DFR also intends to develop an update to its website. As part of the website improvements, the Captive Division would like to include updated checklists and other resources for download by its users.
Lastly, the Captive Division developed and executed an outreach initiative in 2018. The project consisted of presenting to captive managers recent updates to our processes and procedures, tips and helpful hints to improve activities relating to licensing, annual reporting, and examinations. The venue allows for a meaningful exchange of information in a confidential setting between regulators and captive managers. Feedback from captive managers pointed to a successful launch of our outreach efforts, so there are plans underway to continue with the initiative on a periodic basis.
WHAT IS YOUR OVERALL VIEW OF THE CAPTIVE INDUSTRY RIGHT NOW? WHAT DO YOU VIEW AS THE BIGGEST THREATS CURRENTLY FACING THE INDUSTRY AND HOW IS VERMONT ADDRESSING THEM?
The captive insurance industry is an important sector in the overall insurance marketplace. Commercial pricing has been soft for some time now, yet organizations are still finding value in managing their own risk using a captive insurance company. The captive insurance marketplace may be one of many reasons why the soft market cycle has been so prolonged. Regardless, everyone benefits from better risk management in an organization, so I believe the captive insurance marketplace will be around indefinitely.
That doesn’t mean the industry hasn’t faced some serious challenges. We have witnessed the proliferation of U.S. captive domiciles over the last 10 years or more, which has produced additional competition for market share. We meet that challenge by focusing on consistent, quality regulation that attracts quality insurance programs that are intended for risk management and risk financing of its beneficial owners. Vermont also strikes a balance between innovation and reasonable standards that avoid regulatory risk. The Vermont DFR is vested in being experts in their field, working at the speed of business, and protecting the reputation of its family of captives. We typically find that what Vermont has to offer, in terms of its world class management professionals, attorneys, accountants, bankers, investment managers, and actuaries, that we naturally attract businesses that want to be regulated responsibly because it protects the owners’ best interests. We know that good “customer service” holds a great deal of value to our stakeholders. We work hard to keep a watch on prospective threats. We maintain open lines of communication with industry, and other regulators. If a potential threat presents itself, we have a qualified team to put our heads together to determine if Vermont has a stake in addressing the challenge.
Periodically, the captive insurance industry has faced various regulatory challenges, from federal agencies and state jurisdictions, whereby the captive insurance model, the interpretation of captive insurance, the legality of captive insurance, or the imposition of taxes and fees on businesses owning captive insurance companies is questioned or becomes a center of focus. The industry has several parties which advocates on its behalf, including but not limited to, the Vermont Captive Insurance Association – the world’s largest captive insurance industry association- with legislative representation at both the state and federal level, the Captive Insurance Companies Association, and the National Risk Retention Association. Corporations and organizations owning captives themselves, hold the power of advocacy in jurisdictions where they are located. Additionally, the captive insurance industry has a voice at the NAIC. Vermont’s leadership is represented on various committees and working groups at the NAIC.
Although Vermont has weathered fairly the impact of the federal Non-admitted and Reinsurance Reform Act of 2010 (the Act), the imposition of additional taxes on a company’s private insurance transactions increases the cost of doing business for a company in a state where the business is headquartered. While Vermont has had several re-domestications since the Act, many captives that chose to stay in Vermont executed other types of solutions to limit the self-procurement exposure. One such solution was to establish a captive insurance company in the home state for the risks in that state, then reinsure that risk to the Vermont captive. There were other varying solutions as well. Self-procurement tax doesn’t apply to fronted insurance programs, whereby the captive acts as the reinsurer of the owner’s risk, and it also doesn’t apply to risk retention groups.
Another challenge facing the industry is attracting future talent. However, I view this as a positive challenge because it’s forcing many different organizations in the industry to collaborate on mentoring programs, education, outreach initiatives, and succession planning. I would like to see more opportunities provided to individuals for job sharing and participation in industry activities. If those opportunities prove to add value to the industry or have a positive impact on operations of an organization, folks are more apt to choose to work in the industry as a result. The Vermont DFR has internships each summer to provide college students with experience and exposure to the industry through all aspects of financial regulation. For graduating students, gaining access to a type of education program that allows students to shift between multiple industry activities and roles (i.e. risk management to finance to regulation) might have a profound impact on new talent entering the industry.
I have been fortunate over the past year or two to have hired folks who have 25 and 30 years of industry experience. The future of the industry will need to rely on the current pool of talent as well as new talent. Overall, the Vermont DFR has the largest governmental staff of experienced captive insurance professionals in the world, delivering an efficient and effective application process, prompt response time to business plan changes, accessibility to inquiries, and effective, efficient examinations that minimize time and expense. The Captive Division is committed to maintaining a team of world-class qualified staff to keep pace with delivering quality regulation, so the topic of succession planning and attracting future talent is one that we are paying attention to.