State of Vermont
Gold plated; ruby dated
In 2021, Vermont’s captive insurance industry celebrates its 40th anniversary. Two of the state’s captive insurance regulators, past and present, Derick White and David Provost, discuss the secrets of its success.
“As a small economy, Vermont was grateful for every tax dollar it could get.”
David Provost, Vermont Department of Financial Regulation
Vermont’s captive insurance industry was officially born in 1981, making it 40 years old in 2021. Before that, the state had a very small insurance industry, with only a handful of commercial insurance carriers calling it home. Impressed by the burgeoning captives industry in Bermuda, a small group wanted to bring the concept to the US and decided on the small state of Vermont.
The story goes that when the idea was first presented to the Vermont state government, it rejected the idea out of hand, before changing its mind after a bad ski season left a shortfall in tax revenues.
Vermont’s captive legislation was introduced by George Chaffee, who was the commissioner of the department of banking and insurance at the time. Chaffee’s boss, Governor Richard Snelling, was a businessman who was convinced that having a captive insurance industry in Vermont would generate economic benefits for the state, with very little downside risk.
Once Vermont had drafted its captive insurance legislation, the state quickly emerged as the leading onshore US domicile for captives, a distinction it has held ever since. It was not the first US state to have captive insurance legislation, but Vermont stole a march on the small number of states that came before it by working hard to simplify the process of forming and managing captives.
Vermont recognised the benefits of being in the captive insurance business and was determined to create an environment that was as business-friendly as possible.
Current deputy commissioner of captive insurance for the Vermont Department of Financial Regulation (DFR), David Provost recalls: “As a small economy, Vermont was grateful for every tax dollar it could get. Even a captive insurer with premiums of less than $1 million was made to feel welcome here.”
Vermont did away with a requirement for countersignatures and proof of inability to secure coverage (which were requirements of other states), and allowed the use of letters of credit for capital. Measures such as these helped establish Vermont as the onshore domicile of choice for captive insurance.
Ed Meehan and Len Crouse were the first two captive directors who set the tone for the regulatory oversight. Both were experienced regulators with a common-sense approach. The term “firm but flexible” became the standard by which Vermont was known. Crouse was appointed as the first deputy commissioner of captives when the captives division was spun off from the insurance division in 2003.
The early days
“Regulators are people too, with a job to do.”
Derick White, Strategic Risk Solutions
In the early days, Vermont had a small committee of people to approve new captive formations. Known colloquially as “The Gang of Five”, the committee drew together people from different disciplines in the captive insurance industry, including an actuary, a lawyer, and an insurance manager to advise the regulators. Most captives in Vermont wrote a few lines of coverage, such as auto and general liability. Most of the business was fronted, with very few deductibles.
Over time, the industry evolved and matured. Within a few years, the Gang of Five had been discontinued with the regulators taking over the role together with paid outside actuarial advisors. It was, however, an early example of Vermont’s broader approach to regulating captives, which includes close collaboration and consultation with industry participants.
Derick White, current managing director of corporate governance and compliance at Strategic Risk Solutions (SRS) in Vermont, was director of the captive insurance division for the State of Vermont between May 1992 and January 2008. That period saw the industry mature and grow, and establish itself as the leading domicile in the US.
“There were six people in the department when I joined and there were few formal procedures in place,” White recalls. “During my time at the DFR the department grew, and we developed more formal procedures. We also secured a market factor adjustment to ensure we could offer competitive pay and attract the best talent to the department.”
The commercial insurance industry was also coming to terms with the emergence of an increasingly vibrant captive insurance sector in Vermont and elsewhere.
“Until the mid-1990s, the relationship between the commercial insurance industry and captives was quite strained, as commercial insurers saw captives as competitors. During the 1990s they came to understand that they must work with captives,” notes White.
Over time, captives became increasingly sophisticated, writing an increasing number of lines of coverage, with companies likely to keep risk as a deductible and the captive taking the next layer.
Today, there are 28 people working for the Vermont Captive Insurance Division, and around 410 employed full-time in the broader Vermont captive insurance industry, made up of service providers. The DFR still does not employ any in-house actuaries.
“An actuary would earn more than the state governor and we couldn’t have that,” quips Provost. “We have at least 16 actuary firms that we can call on when needed, which gives us access to all the experience and specialists in different coverages that we need.”
Trust at the heart of regulation
Vermont’s captives industry is characterised by the strong and productive relationship that exists between its regulators and the industry. Great effort is put into building trust between the two sides.
With Provost at the helm, captive insurance regulation in Vermont is led by someone who has experience of being on the other side of the table.
“You don’t have to have an industry background to be a good regulator, I know people who took a different route, but it has certainly been helpful for me,” he says. “I understand the work that goes into preparing annual statements and the importance of meeting deadlines and having questions answered quickly, which is why it is such a high priority in Vermont that we respond to questions within days, if not sooner.”
Others have made the opposite journey, from regulator to the industry. White, for example, followed his stint at the department with a move to SRS. Such moves have also reinforced the strength of the relationship between industry and regulator, since he is able to carry his knowledge forward in his current work.
“When I was a regulator I thought insurance managers were in charge of running the captive, but being at SRS has taught me that the client is the boss and the manager can only advise,” White says.
“I also understand that regulators don’t ask for things they don’t need and that, when making an application to the regulator, you want to give them everything they need to allow them to say yes. If you want a positive answer quickly, you don’t make them ask for additional information, you want to give them everything they need up front.
“Regulators are people too, with a job to do. They are charged with properly regulating insurance companies and need information to support their decisions.”
Provost emphasises the importance of maintaining open lines of communication between the regulator and the industry.
“We don’t want captive managers to be afraid to talk to us openly when there is bad news, we want them to trust us and be open so that we can work together to find a solution,” he says.
“It is very much the same as the relationship the National Association of Insurance Commissioners has with the industry, and it is consistent with the broader US approach to regulation, compared to other parts of the world.
“In the US, there is always a willingness to listen to input from the industry.”
Provost was promoted to deputy commissioner in 2008, the same year as the global financial crisis. “In those early days I spent a lot of time in meetings with captives discussing the problems they were having with their investment portfolios,” he recalls.
“Many of their bonds were impossible to sell and they were technically insolvent, but obviously those were special circumstances and we worked together to get through that. It was a similar situation more recently with COVID-19.”
Regulatory philosophy
While Vermont is proud of the adaptability of its regulation, there are limits, and it is not entirely malleable to the will of the industry it oversees. Regulators adhere to the ethics policy that applies across the DFR.
Regulatory staff attend industry gatherings, building relationships with the industry and ensuring they remain familiar with market developments. They steer away from anything that could lead to an actual or perceived conflict of interest.
The regulatory philosophy is exemplified by its approach to new launches, which is also notably collaborative. “We don’t count the captives we turn down in Vermont because we try to identify the ones we don’t want before they even apply,” explains Provost.
“We try to sit down and talk through proposals even before any formal application is made, so we actually reject very few formal applications. The advantage of this is we can explain exactly what we need, so when they make their application, we’re digging into details of the feasibility study, not questioning whether this plan will fit within our statutory framework.”
After a captive is licensed, it often needs to change its plan of operation. Provost says the ideal plan change is one where, by the time it arrives on the regulator’s desk, the information is complete and it needs nothing more than a stamp of approval.
“We don’t write a letter that simply regurgitates the company’s communication—we want them to put the plan in their own words, and the insurance manager should be able to articulate their business better than we can.
“What we are really looking for is a focus on the insurance side of things. We always get questions about our view on tax elections, and our view is simple—we regulate insurance companies; the IRS enforces the tax code. If, for example, the applicant seems more interested in talking about tax than insurance then maybe Vermont isn’t for them,” he concludes.
It’s clear that there is an ongoing commitment to Vermont’s captives and their needs in every aspect of the industry as there has been over the last 40 years.
Derick White is managing director of corporate governance and compliance at Strategic Risk Solutions, Vermont. He can be contacted at: derick.white@strategicrisks.com
David Provost is deputy commissioner of captive insurance for the Vermont Department of Financial Regulation. He can be contacted at: david.provost@vermont.gov
