Vermont Lowers Requirement for Association Captives

Vermont has tweaked its captive legislation to become more competitive with other domiciles, the head of the Vermont Captive Insurance Association said.

Gov. Jim Douglas recently approved a bill that reduces the minimum capital and surplus required for an association captive insurance company, dropping the requirement from $750,000 to $500,000. The minimum required for sponsored captives is also $500,000.

The VCIA had lobbied for the change, said Richard S. Smith, who took the helm as president of the association in October.

"We had looked at the industry as a whole, and comparing Vermont to other domiciles, we saw some areas where we were potentially not as competitive," Smith said. "This shows the state is willing to look at the environment out there, and make changes to remain competitive."

Competition among domiciles has grown in recent years, he said.

"What you've seen is states that see the success Vermont and some other domiciles have had in attracting the industry, and they want to be a part of that. But if they copy the regulations but don't have consistency and expertise, it can be a short run for them," Smith said.

Business for Vermont captives is still good, he said, despite the soft market. Conventional wisdom is that companies tend to flee the standard market and form captives when the insurance cycle is hard, but that may be a myth today, Smith said.

"I think what you are seeing is risk managers are looking to take more of a long-term look at their risk profiles to even out the uncertainty going forward," Smith said. "Whether it's a hard market or a soft market, companies are looking at using captives for their risk management needs."

Smith took the helm of the VCIA after being the deputy commissioner of Vermont's public service department, where he oversaw the energy and telecommunications markets. Also, Smith had previously been deputy commissioner of the state's economic development department.

"Not only did I get a good introduction and steeped in economic development, I got to work on the regulatory side. I understand the importance of regulation and the partnership you have to have with the people you regulate for it to go smoothly. Captives are an example of that, you want strong, consistent regulation, and Vermont provides that," Smith said.

While more than half of all states have a captive law on the books, Vermont is the largest U.S. domicile for captives. The state is the third-largest captive insurance domicile in the world, with gross written premium estimated for 2009 in excess of $20 billion, (BestWire, June 10, 2010). Forty-two companies in the Fortune 100 and 18 of the companies included in the Dow 30 have Vermont-based captives.

(By Meg Green, senior associate editor, BestWeek: [email protected])