Vermont’s Captive Insurance Law

How VT H.515 Affects Captive Insurance

Written by Nancy Jamali

What is Captive Insurance?

Simply put, a captive is an supplemental insurance company, owned and controlled by a noninsurance body. Captive insurance exists to mitigate risks involved when a corporation employs an insurer. Since the insurer is under the sole management of the parent, it generates revenue for the owner. However, this also means that the controlling enterprise must also pay losses. Ultimately, this gives the parent company greater control over their liabilities.

What is VT H.515?

On May 27th, Vermont Governor Phil Scott signed legislation H.515, an act that applies to banking, insurance and securities, into law. The main objectives of this law aim to streamline captive insurance policies and eliminate discrepancies. The law specifically:

• allows captive insurers to enter into parametric risk transfer contracts,
• simplifies reporting procedures,
• clarifies inconsistencies and delinquency procedures regarding sponsored “cell” captives.

Parametric Risk Transfer Contracts

Parametric risk transfer contracts offer value to an insurance policy. They provide the policyholders an outlet to assume a specified sum upon the occurrence of a catastrophic event (such as earthquakes, hurricanes, or floods). The insured buys a predetermined amount of protection that pays out in such events, regardless of the amount of loss actually incurred. Essentially, a parametric contract eliminates delays involved with a traditional adjustment process. Traditionally, a surveyor will take time to assess the amount of actual damage prior to issuing payment. A parametric solution can process payment within weeks of an event.

“Although purely parametric contracts are not considered insurance due in large part to that distinction, the contract is a useful risk management tool,” said deputy commissioner David Provost of the Department of Financial Regulation, “and there are safe harbor features that can be built into the contract to qualify it as insurance. Organizations often use captives as a central repository for all types of risk management tools, not just insurance, so it will be helpful for companies to have explicit authority for their captive to enter into parametric contracts.”

Simplified Reporting Procedures

Approximately 15% of Vermont’s captives file on a fiscal year basis. These filers are no longer required to complete a special calendar year report. Instead they are only responsible for submitting a simpler report for premium tax reconciliation on a fiscal year basis.

“These smaller changes, when added up year after year, make all the difference for captive insurance companies,” said Brittany Nevins, captive insurance economic development director. “Vermont continues to be proactive and ask, ‘what can we do to be better?’ This is central to our industry culture in our state.”

Clarifying Inconsistencies and Improving Delinquency Procedures Regarding Cell Captives

A “cell” captive is a licensed insurance vehicle developed and sponsored by a parent company to be utilized by other businesses. This provides smaller businesses with the necessary infrastructure to manage their risk by virtually “renting” a cell from a sponsor. The law clarifies that cells may insure the risks of one or more participants or parties, provided that there is Commissioner approval. If a cell becomes insolvent, the law authorizes the Department of Financial Regulation (DFR) to carefully handle the afflicted cell with minimal impact to the solvent cells. Additionally, “consolidations” was eliminated from 6006a of the act, which is specific only to captive mergers and not consolidations.

“Vermont is always looking to improve its laws to better meet the needs of captive insurance companies, while improving the quality of our regulation,” said Governor Phil Scott. “This year is a great example of that.”

 

Questions or concerns regarding Vermont’s H.515? Contact a Huggins Actuary for assistance.