Captive insurance industry tends to be counter-cyclical, lawmakers consider beneficial provisionAmid the gloom enshrouding Vermont’s economy, one bright spot stands out: the captive- insurance sector. In fact, its glow may grow even brighter in the coming year, despite the dimming prospects for an early recovery.”It’s counter-cyclical,” Molly Lambert, president of the Vermont Captive Insurance Association, says in regard to her industry. “As conditions become more volatile, companies learn to take more control of what they can. Risk management is one of those areas, so the mechanism of captive insurance becomes very attractive.”Long before the current recession, many businesses were establishing their own insurance companies, known as captives, in order to cover themselves for property and casualty losses. Captive insurance related to workers’ compensation claims has proved popular as well, while firms in particular industries have also insured themselves against specific types of risk.In the 28 years since BF Goodrich became the first company to establish a captive in Vermont, this form of insurance has been widely embraced for its efficacy and money-saving potential. “It’s now a well-accepted way of covering risk,” Lambert says. “It’s not looked at as a far-fetched, alternative sort of thing.”Due to Vermont’s visionary initiative in the early ’80s and its diligent follow-through in subsequent decades, far more captives have come to be domiciled in Vermont than in any other state. Starting with Goodrich, Vermont has licensed a total of 863 captives; South Carolina, the second-ranking state, recently celebrated its 200th licensing.Vermont also ranks third in the world as a domicile for captives. Only Bermuda and the Cayman Islands have issued more licenses.An entire industry, mainly situated in Burlington, now revolves around the captives. It directly accounts for 400 Vermont jobs that pay an average annual salary of about $52,000, according to Lambert’s trade association. As many as 1,000 additional positions at banks, law offices, accounting firms and other businesses depend to a significant degree on the captives, the association estimates.Captive-insurance management companies are continuing to hire – even at a time when jobs in almost every other white-collar sector are hard to find, Lambert says. There actually aren’t enough accountants in the Burlington area to keep pace with captives’ demands for their services, she notes.Another 16 captives set up operations in Vermont last year, bringing the total of active firms in the state to nearly 600. And the industry’s promoters suggest that Vermont should manage in 2009 to return to its historic average of attracting between 25 and 30 new captives per year.The growth rate slowed last year due in part to a proposed federal tax regulation that would have prevented captives based in the United States from claiming deductions for money set aside to cover future claims. The proposal produced a sense of uncertainty that discouraged many companies from launching captives, notes Dan Towle, specialist on this sector who works for the Vermont Department of Economic Development. The Internal Revenue Service ultimately decided to withdraw its proposal, but soon afterward the U.S. economy began its nosedive. “That took everyone’s focus off new initiatives,” Lambert says.Industry experts expect the rate of captive formation to resume this year even if the general economy continues to sputter. “While nothing is technically recession-proof, insurance does have to be there, boom or bust,” notes Tim East, a director of risk management for The Walt Disney Co. And Towle declares himself “very bullish on both 2009 and 2010. The stars are all aligned for us to do very well.”Lambert echoes that optimistic appraisal, saying “Vermont has a great chance to put a lot of distance between it and the competition.” More and more companies are expressing interest in establishing captives, with Vermont widely identified as the preferred venue, Lambert finds. She points to a “road show” that her association regularly stages in Atlanta that usually draws between 40 and 60 registrants. This year, 75 have signed up in advance, Lambert says.Growing interest in Vermont among companies forming captives may be motivated by a newfound desire by some to base their insurance operation in the United States rather than offshore, Lambert suggests. And the Vermont brand, along with the state’s expertise in this area, drives decisions to locate captives here. “Boards of directors are very sensitive now to how their actions are being perceived by the public,” she says. “When you open a captive insurance company in Vermont, there’s no thought that it’s anything but pure and high-quality.”East, the California-based manager of two Disney captives, says the company chose Vermont “because of the infrastructure that’s available there” in the form of legal, accounting and regulatory resources. State overseers of the industry have managed to strike a balance between flexibility and firmness that Disney and other companies find appealing, East explains. “Their regulations are reasonably stringent and they have high expectations. But while holding to high standards they’re able to work with captives’ owners,” East says.Dianne Salter, vice president of the Mountain Laurel Risk Retention Group, adds that her captive came to Vermont in 2002 because state regulators were able to help it get established in short order. Mountain Laurel was created by Jefferson Health System, which at that time was being buffeted by “a crisis of medical malpractice insurance,” Salter notes. Because the crunch was especially acute in the Philadelphia area where Jefferson is based, “we needed to get something done quickly,” she says. “Vermont helped us move fast.”But no regulatory shortcuts were taken, she adds, noting that Pennsylvania officials were familiar with Vermont’s protocol for captives and “felt very comfortable with the regulation in Vermont.”The turmoil shaking the financial markets has not been experienced in the captive insurance sector, Lambert notes. That’s partly because “it’s a well-managed, well-capitalized industry,” she says. There’s been no known instance of a troubled company misdirecting funds from its captive, Lambert points out.The stability may also be partly attributable to the sure-handedness of Vermont’s experienced regulators. The collapse of Enron, for example, did not result in disruptions in the operations of the Texas corporation’s Vermont-based captive, notes David Provost, who oversees captive insurance for the state’s Banking, Insurance, Securities and Health Care Administration (Bishca). “We handled the dissolution of the Enron captive appropriately,” Provost says. “They didn’t run off with the money. All claims were paid.”Vermont’s relative remoteness does not appear to present obstacles to companies that have situated their captives here. Most of the insurance firms with Burlington addresses are in fact managed from other states, with officials of the parent companies visiting Vermont occasionally to meet with regulators, lawyers and accountants.Both Salter and East say they do not share the view held by some out-of-state business executives that travel to Vermont can be inconvenient and time-consuming. East says Vermont is relatively close to Disney offices in New York and Connecticut, while Salter notes that it’s only a little over 1-hour flying time from Philadelphia to Burlington.One of the qualities that captives find especially appealing about Vermont is the ability of regulators and political leaders to respond in timely fashion to changing circumstances, Salter says.”Vermont is constantly looking for options so it can improve. Vermont is always on the cutting edge,” she observes.For example, Lambert is currently lobbying legislators to win approval of a proposal to exempt a newly formed captive from paying the minimum $7,500 yearly premium tax. It’s a small, mainly symbolic gesture intended to signal Vermont’s eagerness to remain the preferred venue for captive insurance companies, Lambert says. A total of 30 states now compete with Vermont to attract captives, and it’s important to offer incentives as a sign of continued commitment to the industry, she adds.The Legislature adopted this same provision a few years ago and it remained in place until it reached its sunset date.”This seemed like a good year” to revive the tax break, Lambert says.She notes that the move wouldn’t cost the state much in the way of lost tax revenues – less than $200,000 if Vermont were to succeed in attracting 25 new captives this year. The newcomers would still have to pay premium taxes in excess of $7,500, meaning that a captive with a tax bill of $200,000 would be required to put $192,500 in the state’s coffers.A portion of the $24.5 million in premium taxes that the state collected from captives last year goes to cover the costs of regulating and promoting the industry.”This is all money that Vermont is getting from out-of-state sources,” notes Towle, the financial services director for the Department of Economic Development. “It’s not coming out of Vermonters’ pockets.”Towle works close to fulltime to support the captive insurance sector. But he’s the only state official focused on developing an industry that has proved highly beneficial to Vermont and that holds the promise – exceptionally valuable these days – for strong growth potential. So shouldn’t the state be putting more resources into its efforts to lure captives?”The governor and the state Legislature have given us tremendous tools to be successful,” Towle responds. Vermont excels, he adds, because competitor states “haven’t had such tremendous support from their governors and legislators.”Kevin J Kelley is a freelance writer from Burlington and US Correspondent for Nation Media Group (Kenya).