Captive Benefits

Might captive insurance be right for you?

In 1981 Vermont enacted a law permitting the formation and operation of captive insurance companies — “captives.” In the ensuing 27 years, more than 800 captives have been licensed in Vermont. At this time, about 570 captives are operating in Vermont providing insurance coverage to their owners.

In general, a captive insurance company is one that insures only the risks of its parent entity. One commonly asked question is why form a captive in Vermont? Not every captive has been formed for the same reason, but there are a number of commonly identified benefits, including coverage and premium stabilization, access to coverage not available in commercial markets, harmonization of national/global insurance programs, direct access to reinsurance, control of claims administration, and certain benefits available under the tax code.

For example, from 2002 to 2004, commercial insurance companies often refused to provide any medical liability insurance to hospitals and physicians in Pennsylvania. Many health-care providers reacted by forming Vermont-based risk-retention groups, a form of group captive with special privileges to operate outside of Vermont under federal law.

The medical liability insurance market has stabilized in Pennsylvania, but health-care providers continue to use Vermont captives to obtain pricing stability. Interestingly, these captives have also provided a valuable insight into risk management and patient safety initiatives.

“Why Vermont?” is a challenging question. First, Vermont was the creator of the captive insurance law. Second, Vermont never rested on its laurels; the captive statute has been revised and enhanced whenever someone had a good idea. Third, Vermont captive owners, operators, and service providers have formed a world-class trade organization known as the VCIA. Fourth, and most important, Vermont established a separate captive division composed of some of the best insurance regulators in the country.

This is essential, as many regulators from other states believed that a substantially deregulated form of insurance company would not remain solvent for long. Although pundits predicted that Vermont’s form of regulation simply wouldn’t work, the skeptics have been proven wrong. A combination of flexibility in evaluating the business plans of prospective captive applicants, a solid statutory infrastructure, dedicated regulators, a large concentration of sophisticated service providers, and the steadfast commitment by legislators and governors of all political backgrounds have resulted in arguably the best captive domicile in the world.

How does one form a Vermont captive? The Vermont Department of Banking, Insurance, Securities and Health Care Administration’s (BISHCA) Web site under the Captive Division is a good starting place.

The site contains all the documents needed to prepare an application. The next step would be to meet with an approved captive manager (contact information is also on the Web site) to discuss the insurance program and the steps necessary to complete and submit a satisfactory application to BISHCA.

At some point early in the process you will likely want to talk to a captive insurance lawyer about the legal structure of the entity and preparation/review of key documents and agreements. Accountants are essential in evaluating financial reporting issues and preparing financial statements.

Finally, an applicant will need to secure the services of an actuary who will evaluate the necessary funding and prepare the required actuarial feasibility study. BISHCA will usually act to issue a license to operate as a captive insurance company within 30 to 60 days after an application is filed.

It isn’t cheap to form a Vermont captive insurance company. There is general consensus that an applicant’s business must have about $1 million in annual premium to cover the formation and operational costs on an ongoing basis.

For those who proceed, best wishes. You will be joining a vibrant community of national and international businesses that have elected to form and operate Vermont captives. •

Jeff Johnson is a shareholder and director of Primmer Piper Eggleston & Cramer PC and a recipient of the VCIA’s 2007 Industry Service Award.