Vermont faces challengers in captives market

With its federal structure, the US encourages a sort of regulatory entrepreneurship: its states and territories have long used their powers over civil, corporation and criminal law to create economic niches or compete in specialised markets.

This creative use of law-making powers created Nevada’s world-famous gaming industry and made tiny Delaware the nation’s premier corporation registry.

Since US states control insurance regulation, they can also offer themselves as friendly jurisdictions for various kinds of insurer, tailoring laws and regulations accordingly. One area where states are battling for insurance business is the US captives market: since the 1970s, many states have adopted similar statutes and promoted themselves as a good place for corporations to set up in-house insurers.

Vermont, which was among the first states to set out its stall as a captives domicile, is the market leader today. Its leaders and officials credit administrative efficiency, close ties between state and industry, active publicity efforts and strong regulation. But Vermont faces no shortage of competitors, all offering a combination of efficiency, location and attentiveness to industry concerns.

Although home to fewer than 650,000 people, Vermont had 632 active captives as of the end of last year, according to state figures, and added another 15 captives in the first quarter of this year. Internationally, only Bermuda and the Cayman Islands have captive markets of similar scale, according to data from Allianz Commercial.

Brittany Nevins, captive insurance economic development director at the Vermont Department of Economic Development, says the state has been attracting captive insurers “through investment in a robust and expert regulatory division, bipartisan legislative support, collaboration with the Vermont Captive Insurance Association [VCIA]… and intentional marketing and business recruitment strategies”. Vermont passed its captives statute in 1981.

The state was able to take advantage of tight insurance markets in the mid-1980s, J Zaw Win, director of captive insurance at Downs Rachlin Martin, a Vermont law firm, says, adding: “In 1986 it was a record year for new captive formations and the industry grew rapidly from that point forward.”

The state named an official to manage the state’s appeal to captives “very early on”. Vermont also had help from “some national insurance brokers, [which] established offices here and actively promoted Vermont as a domicile,” Zaw Win says.

On its official website, the state’s commerce agency says Vermont offers rapid processing of applications and a specialised regulatory team with more than 30 staff. Having a dedicated office allows it to make licensing decisions within 30 days, it claims.

One notable feature of Vermont’s captive insurance regime is policymakers update the captive insurance statute annually. Nevins says this is a “natural process given the level of collaboration between the Department of Financial Regulation and the [VCIA]”.

Vermont’s administrative officials and politicians say the captive sector enjoys support from all parts of the political spectrum. Michael Marcotte, a Republican legislator and chair of the state House of Representatives’ commerce committee, says the annual fine-tuning of captives legislation “helps keep Vermont in the forefront of being the top domicile of the captive insurance industry worldwide”.

“I think we attract captives to the state because of our willingness to amend the laws that govern them in ways that provide flexibility and at times room for them to experiment,” Logan Nicoll, a Democratic state representative, says.

Domestic competitors

Although it is the largest US haven for captive insurers, Vermont has many domestic competitors. Utah, Delaware, North Carolina and Hawaii all rank among the 10 largest domiciles for captives globally, according to Allianz Commercial. The insurer puts Utah in second place with 384 captives and Delaware in third with 313.

Allianz lists several other jurisdictions with 100-plus captives, including Nevada, Arizona, South Carolina, the District of Columbia and Tennessee. The District of Columbia, the formal name for the federal territory comprising Washington DC, has state-like home rule powers under a 1973 act of Congress.

A couple of these states actually preceded Vermont into the captives market – Colorado and Tennessee adopted captives laws in the 1970s.

Some jurisdictions have carved out market share by creating novel or specialised legal forms to meet business demand. Dana Sheppard, deputy commissioner in the District of Columbia’s department of insurance, securities and banking, says the district uses “its unique protected cell law” to encourage businesses to set up captives there.

This law allows any type of captive insurer to form one or more protected cells, which may be formed as legal entities such as corporations or LLCs, or as un­incorporated units, Sheppard says.

“I think we attract captives to the state because of our willingness to amend the laws that govern them in ways that provide flexibility and at times room for them to experiment”
_{Logan Nicoll
Vermont Representative}

Joseph Holahan, president of the Captive Insurance Council for the District of Columbia, adds the DC regulators have a general power “to authorise a captive to engage in any activity that is permitted for a captive insurer in any other jurisdiction”.

Holahan believes the district is alone in giving its regulators such “an extraordinary amount of flexibility”.

Tennessee tailors its rules to attract business from abroad. Michael Corbett, president of the Tennessee Captive Insurance Association (TCIA) for 2024 and former head of captives regulation in the state, says Tennessee provides a one-year tax holiday for captives arriving from outside the US and lets captives use foreign currencies.

Efficient service is also a major selling point. Sheppard says the DC insurance department can greenlight captive and cell licences within a day because applicants do not have to separately process articles of incorporation with a different agency.

Nick Stosic, deputy commissioner in Nevada’s division of insurance, says his department has streamlined administrative processes, allowing captives to submit annual reports at the same time as their financial and actuarial statements. Nevada also allows captives to issue dividends up to a certain amount without first obtaining regulatory permission, he adds.

Integrated strategies

States also integrate their efforts to attract captives into wider economic development strategies. For example, a strong captive sector contributes to tourism and hospitality sectors, since captives usually need to have board meetings and the sector’s trade associations hold conventions. Vermont's Nevins says these gatherings generate new employment and revenue for the state’s wider economy.

Stosic boasts Nevada can offer “with Las Vegas and Lake Tahoe, some of the world’s top travel destinations to hold annual captive board meetings”. Walters mentions Tennessee’s “central location, the amenities of our cities, which are becoming more cosmopolitan, and our quality of life”.

Travis Wegkamp, captives insurance director at the Utah Department of Insurance, says Utah adopted its 2003 captives law primarily “to bring well-paying white collar jobs to the community”.

This is why Utah law obliges captive boards to convene at least once a year in the state, although his department will consider “alternative solutions that may accomplish the same intent”.

“Utah is not interested in any ‘race to the bottom of the barrel’. Vermont’s likely going to always have this sense of ownership of captives in the US, and perhaps view others as just attempting to follow the leader”
_{Travis Wegkamp
Utah Department of Insurance}

Like Vermont, other jurisdictions regularly update their captives laws, working with captives sector associations. Sheppard says DC does not amend its laws annually, but plans new refinements next year.

The Nevada insurance division will suggest new amendments to the Nevada legislature in 2025, when it next meets (Nevada’s legislature only meets in odd-numbered years), Stosic says. The department met with the board of the Nevada Captive Insurance Council last month to discuss their recommendations for changes to Nevada’s captive laws, he adds.

In Tennessee the TCIA and the state’s insurance department meet annually to discuss possible legislative refinements. “Sometimes the department chooses to update the legislation and sometimes the TCIA will pass legislation on their own separately from the Department but with our support,” Kevin Walters, communications director for the Tennessee department of commerce and insurance, says.

Utah has made at least minor amendments to its captives law each year since he began working at the state insurance department in 2011, Wegkamp says.

The state’s insurance department consults with the captives trade association, the Utah Captive Insurance Association, on supervisory issues.

Tom Adams, president of the North Carolina Captive Insurance Association (NCCIA), says his organisation is “in pretty much constant communication” with the state insurance commissioner’s office. The regulator’s captives unit also sends personnel to NCCIA meetings, “and we jointly address legislative issues when they arise.”

“It is an outstanding relationship,” Adams adds.

Race to the bottom?

Insurers tend to be less allergic to close regulation than other financial-sector enterprises, given that their business model does not reward risk on either side of the balance sheet. Businesses that want to set up captives may actually prefer rigorous oversight.

Vermont officials sell the state’s regulatory expertise as an attraction to businesses seeking to establish captives. Marcotte says captive sector leaders have told him “the reason they prefer to domicile in Vermont is because of our strong regulatory regime, easy access to our legislators, and the legislature’s willingness to keep the statues up to date”.

Other regulators also tout their state’s professional expertise and rigour. Sheppard says her department employs “knowledgeable and professional staff that understand the intricacies of regulating captive insurers”.

Nevertheless, Sandy Bigglestone, Vermont’s deputy commissioner for captive insurance, worries some of her state’s rivals adopt a less discriminating approach toward licensing and supervision.

“Many other states have copied Vermont’s laws and aim to compete for the business”, she says, but adds: “Unfortunately, some compete by implementing lower regulatory standards, not on quality regulation.”

Bigglestone worries lax standards and inadequate oversight could undermine the captives sector. However, despite the competition, Bigglestone says she is is “confident that companies will continue to choose Vermont for the regulatory and political environment, plus industry knowledge and reputation for quality business”.

“Many other states have copied Vermont’s laws and aim to compete for the business. Unfortunately, some compete by implementing lower regulatory standards, not on quality regulation”
_{Sandy Bigglestone
Vermont}

Unsurprisingly, officials and captives associations in other states dispute Bigglestone’s assessment. Adams says in North Carolina, “our regulators can be plenty tough”, adding that the state’s insurance commissioner has wide discretion to adopt new regulations as they see fit.

Wegkamp says the state “is not interested in any ‘race to the bottom of the barrel’ in terms of our regulations”.

“Vermont’s likely going to always have this sense of ownership of captives in the US, and perhaps view others as just attempting to ‘follow the leader’”, Wegkamp continues. But Utah has not taken any cues from Vermont policy for a long time, he says.

Corbett says: “Tennessee regulators are as well trained and capable as any in the industry.” He adds the state had given CPAs specialised training to act as insurance examiners when he was a regulator.

“It was so successful these CPAs were able to perform Risk Retention Group examination subject to National Association of Insurance Commissioners review and were highly praised for the examinations performed! Less demanding regulations? Hardly,” Corbett insists.