A textbook example.
"A particular domicile may have advantages for a certain company under a specific set of circumstances, so everyone will have a piece of the market," he says. "It's just that Vermont's piece is substantially larger than any other domestic domicile." Moreover, while growth has stalled or slowed for rivals due to a soft insurance market, Vermont continues to post healthy gains in the number of new formations.
There is nothing mysterious about Vermont's success. The state is simply a textbook example of how to nurture captive development. From the time its captive law was enacted in 1981, Vermont has had the unwavering support of the insurance department, legislators of both parties and three state governors.
That unanimous approval has fueled even more growth. "Once you reach a critical mass it does wonders," says Scott Frazier, director of North American operations for Alexander Insurance Managers, a subsidiary of Alexander & Alexander Inc. "When people look at where they want to form, they think of where all the other captives are located. In states where there are only a few domiciled, it may indicate that the state is still trying to work out its bugs."
Vermont's captive industry has also benefitted from the state's relatively small size. "The premium tax dollars are significant and they want to keep it that way," Mr. Frazier says. Also, because the state is small, the insurance division is readily accessible.
Vermont has successfully promoted captive growth by assembling a staff that oversees the industry. The captive division of the insurance department currently numbers six and has plans to expand. Furthermore, the state's captive law allows insurance regulators to spend as much as 2 percent of premium tax revenues to promote captive formation.
If such incentives were not enticement enough, captive insurance is an industry Vermont actively favors, says Mr. Frazier. "It's a non-polluting industry in an environmentally conscious state."
Being in the captive business for 10 years is also an attractive feature to present to prospective business. "The process has been found successful, from start-up to regulatory oversight," says Mr. Frazier.
Although imitation may be the sincerest form of flattery, it can lead to unwanted competition. Following Vermont's lead, Hawaii did the Green Mountain State one better by lowering its own premium tax. Mr. Varty concedes that Hawaii is a formidable competitor, especially for companies located west of the Rockies. Like Vermont, Hawaii dedicates funds for regulation and promotion. However, other states that have copied Vermont's captive law "do not have the horsepower behind them, or they have experience in traditional insurance but little knowledge of how to approach captives," he adds.
One "smart piece of legislation," according to Cheri Hawkins, assistant treasurer and director of insurance for Washington-based Weyerhaeuser Corp., was not taxing portfolio transfers, which allows a company to move its business from one captive to another without suffering a harsh tax penalty.
"A state should be sufficiently regulated so captives do not go insolvent." says Ms. Hawkins. "Insolvencies affect the credibility of the domicile and you want to know that you are in an environment that is not subject to a lot of controversy."
Projection a Consistent Image
VERMONT HAS NOT yet decided how its captive program will respond to the recent slashing of premium tax rates that has occurred in Colorado. "Rather than reacting in a knee-jerk manner, we are thinking about a tax program that will make sense three, five and even 10 years down the road," Mr. Varty says.
Projecting a consistent image is important to Vermont's regulators. After all, according to Mr. Frazier, the state is attracting 80 percent of the onshore captives because of its reputation for consistency. Continuity within the state has also helped Vermont achieve a consistent approach.
Politicians have come and gone, but Vermont's insurance regulators have stayed the course. For instance, Len Crouse, director of captives in the Department of Banking and Insurance, has over 20 years of experience in regulating insurers. Likewise, his predecessor Ed Meehan launched the state's captive program a decade ago and resigned just last year.
In addition, captive management companies are also committed to maintaining a strong presence in the state. Many management companies even set up offices in Vermont before busines came along. In fact, management companies also helped initiate proposed captive legislation in Vermont.
Vermont's geographic location has also indirectly aided captive formation since many groups and companies are headquartered along the Northeast corridor of the United States.
Although the number of offshore captives that have come back on-shore is still only a minority, Vermont is determined to capture the business of Caribbean-based captives. "We are all creatures of habit and a lot of captives have reached a high comfort level in offshore domiciles, so they tend not to do a cost-benefit analysis," Mr. Varty says, referring to the cost-benefit advantages of domiciling in the state.
However, because captives tend to stay with the same management company, Vermont may yet have some success in luring offshore captives. Indeed, with 20 licensed management companies -- more than any other onshore domicile -- Vermont is a logical choice for captives planning to redomesticate.
The state has also tried to build on the success of its captive industry by using it as a catalyst for expanding the service industry sector. For example, the legislature passed a statute permitting the formation of holding companies in the same location as captives. Legislators reasoned that holding company business could be handled by the same management company, thereby drawing on the same banking, accounting and legal relationships. Alcoa, for example, already has four holding companies and is considering another.
While other domiciles may trumpet the fact that they are insurance hubs, Vermont believes it owes its place as a burgeoning captive haven to the absence of major insurance companies. "New York had a big insurance lobby protecting the status quo in that state. We never had that problem in Vermont," explains Mr. Varty.
No Red Tape
VERMONT'S BUSINESS infrastructure, however, is fully developed and can effectively aid captive growth. The state is home to a healthy number of major accounting firms, management companies, brokerages and banks. Applications for domicile are reviewed by one of five review firms, which act in an advisory capacity and are appointed by the commissioner of insurance.
Vermont's captive community itself has also played as active a role in promoting the state as a domicile. At one point, captive companies lobbied for a tax increase with the expectation that the funds would be earmarked for additional regulators.
Richard Heydinger, director of risk management services for Hallmark Cards Inc. and president of the Vermont Captive Insurance Association, says when his company was looking to form a domestic sister captive to its group captive domiciled in Grand Cayman Island, Vermont epitomized an area of "sophisticated regulations with a laid-back style and no layers of red tape or bureaucracy." In addition, Mr. Heydinger says, "On the first visit, we immediately had access to the commissioner. We also got to meet the governor even though we did not have an appointment. It is a small enough state that you feel like you are talking directly to the people running the show."
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|Title Annotation:||A Guide to U.S. Captive Domiciles; Vermont|
|Date:||Apr 1, 1992|
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