By RODD ZOLKOS
March 07, 2005

MONTPELIER, VT. - While licensing 43 new captive insurance companies in 2004 falls short of the pace Vermont established with its record-setting numbers of 77 in 2003 and 70 in 2002, last year's total represents a solid year for the state and demonstrates continued interest in forming captive companies.

As that interest continues, Vermont's history in the captive market, its established industry infrastructure, its regulatory reputation and state officials' responsiveness to captive insurers' needs have combined to give the state front-of-mind status to U.S. companies looking to form captives.

"Forty-three doesn't sound great, but it was our fourth busiest year ever," said Derick White, director of captive insurance in the Vermont Department of Banking, Insurance, Securities & Health Care Administration in Montpelier.

"It probably gives us a chance to catch our breath after two years of unprecedented growth," said Julie Boucher, managing director at Marsh Management Services Inc. in Burlington. While saying, "A good amount of growth is always welcome," Ms. Boucher said, "It would be tough to sustain several years in a row of 70-plus formations."

"For the state, (2004) was still a good year," said Gary Griswold, director-captive operations at SB&T Captive Management Co. in Burlington. "The good thing is, they all seem to be good quality programs."

Among the captives formed in Vermont last year, 29 were pure captives and eight were risk retention groups, with industrial insured, sponsored, association and branch captives making up the remainder.

Companies forming captives in Vermont in 2004 included Wal-Mart Stores Inc., Textron Inc., Cinergy Corp., Whirlpool Corp., Best Buy Co. Inc., USA Hockey Inc. and the New Jersey Sports and Exposition Authority.

"You look at the list of companies we've licensed, it's amazing some of these companies have never had captives before," said Nancy L. Gray, executive director at Aon Insurance Managers (USA) Inc. in Burlington. "They're forming these captives for long-term risk management reasons and they're going to be around for many years."

Of the eight risk retention groups formed in Vermont in 2004, "Those programs were quality programs," said Leonard D. Crouse, Vermont's deputy commissioner of captive insurance in the Department of Banking, Insurance, Securities and Health Care Administration. "A number of them were large hospital groups, large universities with medical facilities."

While licensing 43 captives in 2004, Vermont also saw 26 captives dissolve. The net gain of 17 captives brought the state's total to 524 at year-end 2004. State officials estimate gross written premiums written by Vermont captive companies in 2004 at more than $10 billion, up from $9.4 billion in 2003.

Of the captives that dissolved last year, several were small RRGs, Mr. Crouse said. In addition, "We had a couple of mergers," he said. "I can't say it was all bad to get some of those small companies off the list. They were inactive," Mr. Crouse said. And some of the companies dissolved last year had never been activated after receiving their licenses, the deputy commissioner said.

Most of the newly formed captives in 2004 and thus far in 2005 were created to provide traditional insurance coverages. "The majority of the ones that I've seen so far are your standard property/casualty business," said SB&T's Mr. Griswold.

"Definitely in 2004 the reasons for establishing captives were the more traditional coverages, standard property/casualty lines," said Aon's Ms. Gray. "And that's continuing for us in 2005."

"Probably more property than you'd see looking over the past 10 years," said the state's Mr. White. "Also TRIA as well."

The use of captives to provide terrorism coverage and provide access to the federal Terrorism Risk Insurance Act backstop makes debate over a TRIA extension a closely watched subject for Vermont captives. "To many of our members that has become a very, very important item," said Molly Lambert, president of the Burlington-based Vermont Captive Insurance Assn.

"I think TRIA, whether it's extended, is going to have some impact on captives," Ms. Gray said. "I think a lot of captives were actually reactivated, some dormant ones were reactivated, because of terrorism issues."

"TRIA we're seeing a lot of. Employee benefits, we're seeing a lot of queries without a lot of action," said Guy F. Ragosta, regional executive officer at Willis Management (Vermont) Ltd. in Burlington.

Ms. Gray said that while Aon also has seen some interest in employee benefits captives, the area is developing more slowly than some had anticipated. "Companies are taking the time to evaluate whether it makes sense," she said.

Another development last year that many see as key in Vermont's growth as a domicile is the opening of a Vermont office by the ACE USA division of Bermuda-based ACE Ltd. ACE Captive Solutions Vermont offers captives traditional and structured reinsurance products and risk management programs.

"The first reinsurer coming to the state, ACE, is historic," said Vermont Gov. Jim Douglas. "Some of the captive companies were really seeking one-stop shopping here in Vermont, so to have that happening is really great."

"That speaks volumes to the momentum that we've been able to keep up," said Daniel D. Towle, director financial services in the Vermont Department of Economic Development in Montpelier.

While facing increased competition from other U.S. domiciles like South Carolina, Hawaii and Arizona, Vermont maintains its status as the leader among U.S. domiciles, both in terms of the number of captives domiciled there and, increasingly, in the role it takes in shaping and representing the industry.

"I think last year was the first year Vermont actually saw some serious competition from other captive domiciles," said Ms. Gray. "But if you look at the laws that were passed in some of those domiciles, they were basically mirroring what Vermont had done."

"You have regulators from other captive domiciles calling Len and Derick asking questions about how they should regulate some of their captives," she said.

"I'd still say Vermont's the first name on most people's lips, but it's not quite the automatic it was," said Gary Osborne, group president of USA Risk Group in Montpelier. Still, he said, "Vermont is clearly the gold standard."

"It makes it tough for the others because Vermont really doesn't do anything wrong," said Andrew Sargeant, president of USA Risk Group of Vermont Inc. in Montpelier. And the accessibility of state officials and ability to work with Vermont regulators are key elements of the state's appeal, Mr. Sargeant said.

"Over the years, if you have a captive whose had the parent company having problems, it's not `Press the panic button,"' he said. "It's `Go down and have a chat with Len and Derick."'

"They work with you on problems, which is key," said Willis' Mr. Ragosta. "If we were going to form an RRG we wouldn't go anyplace else but Vermont," he said. "Their surveillance, it's intelligently done."

Vermont's captive division has a staff of 25 with two new positions authorized after July 1. "Staffing has been great as far as getting the staff we need to run a strong department," said Mr. Crouse.

"We're strongly committed to responsive service to registered insurers and want to maintain service," Mr. Douglas, the Vermont governor, said. That responsiveness includes tweaking the state's captive law as needed, including three technical amendments under consideration this year. Those measures relate to easing the conversion from for-profit to nonprofit corporation, allowing the commissioner discretion over investment standards for association captives and RRGs, and allowing branch captives to use a trust fund or a letter of credit to secure obligations.

"If the industry's ideas make good sense we take them to the governor and with his leadership they go to the Legislature," said Mr. Towle. "It's a tremendous model because we have an incredible relationship between the state and the industry."

"Vermont shouts out about the quality of the regulation that it applies to this industry," said the VCIA's Ms. Lambert. "When you've got 25 people in a department dedicated to regulating and scrutinizing something, the Legislature knows they're being asked to only improve on the nature of that regulation."

Vermont's leadership status also includes taking a prominent role in representing the captive industry in any of a number of forums, ranging from a risk retention group study by the federal Government Accountability Office to reviews of regulatory structures by the National Assn. of Insurance Commissioners.

"Vermont's right on top of everything that's going on," Mr. Crouse said. "And I think the industry appreciates that."

"I think Vermont has the leadership position because of the trust that has developed and really the justified position Vermont has for good captives, good regulation," said Roger D. Teese, president and chief executive officer of SB&T Captive Management.

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