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Vermont leads the nation in insurance niche

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January 3, 2008

By MEGAN JAMES

ADDISON COUNTY — When former state Rep. Mark Young of Orwell got his first crash course in Vermont’s captive insurance industry 15 years ago, the rest of the country was suspicious of what the Green Mountain State was up to.

At the time, only a handful of states had laws to license captive insurance companies, which a business may form if it wishes to insure its own risks, rather than get coverage from an outside insurance company.

Once known as “offshore” insurance companies, captives have traditionally operated out of places like Bermuda and the Cayman Islands. But back in 1992, Vermont’s captive industry was already on its way to becoming the largest in any state in the country.

Today, it is the second largest in the world, and the economic benefits for Vermont are undeniable. Besides creating employment opportunities for young Vermonters with a college degree — there are nearly 1,500 related jobs — the industry brought in $24.3 million last year in tax revenue.

“And think about it, there’s no smoke, there’s no pollution, no trailer trucks coming in and out,” Young said. “It’s a huge thing for Vermont.”

In 2003, the last time the state released a comprehensive evaluation of the captive industry’s economic impact, 1,429 Vermonters worked in the industry. The average salary for those jobs was $55,179, about 60 percent above the average private, non-farming job in Vermont, according to Dan Towle, Director of Financial Services at the Vermont Department of Economic Development.

This year 814 businesses have captive insurance licensed in Vermont, and $11.5 billion has flowed through the state in premium payments.

“Vermont started from humble beginnings, and now we’re the second largest in the world (behind Bermuda),” Towle said.

But back in 1992, few could have guessed that Vermont would be known worldwide for anything but maple syrup. That’s when Young, an Orwell resident, attended the annual National Conference of Insurance Legislators to make the case for the state’s up-and-coming industry.


BENEFITS TO THE INSURED

A captive, he explained, is a formalized type of self-insurance. When a business chooses not to insure with a traditional insurance company, it can assume its own risks with a captive.

Take Hallmark Cards, for example. When the company decided it wanted to form its own insurance company, it came to Vermont’s Commissioner of Insurance, put down the reserves and capital required to start any company and hired a Vermont management firm to run its captive.

“It’s no different from any other insurance company, except that (the captive) has only one insured client: Hallmark Cards,” Young said.

This has many benefits for the company, one of which is the opportunity to decide exactly what kind of claims the company is willing to pay.

A luxury hotel, for example, may want its insurance company to pay minor claims from hotel guests — claims that traditional insurance companies might object to — rather than lose valuable customers.

“If you have a movie celebrity who’s renting the penthouse room in your hotel and paying $10,000 a night, and they have a frivolous claim, like spilling coffee on themselves, you might want to just pay the claim instead of ticking off the person and losing them as a client,” Young explained.

Smaller businesses that come together to form their own captives insuring similar risks also benefit from the opportunity to design their own policies. Known as risk retention groups, these captives can cover anything from roofers, to doctors, to public housing authorities — businesses that may not have the capital to form a captive on their own.

This is a good option “if you’re in a group of people that have a lot of losses and insurance companies don’t really want to run the risk of insuring you,” Young said.

Captives can lift a burden from the state’s insurance department, too, he said, because the state doesn’t have to worry about uninformed, naïve consumers.

“If it’s a big insurance company, there are thousands of people insured, so you have to watch to make sure the company is a good actor: it treats its customers well, makes timely payment of claims, its notices are well-worded, all that consumer protection stuff.”

With a captive, Young said, the chance of having an uninformed consumer is much smaller because the customers the insurance company is protecting are the ones who formed the company.

The benefits to the state of Vermont, however, have been the most notable. In addition to the revenue from taxes on premiums and other costs, all businesses with captives in this state are required by law to hold at least one meeting each year in Vermont, meaning more than 800 companies plan annual visits to places like Ferrisburgh’s Basin Harbor Club and other area resorts and inns, stimulating the state’s economy.

KEEPING YOUNG PEOPLE IN VERMONT

The industry has also filled the need for well-paying jobs that may entice Vermont college graduates to stick around for a while.

Young’s oldest son, Russell, is a perfect example. The Orwell native graduated from Dartmouth College in 1997 and Vermont Law School in 2001.

“It was very important for me to find a job in Vermont,” Russell Young said. “My wife and I decided, regardless of the economics, we wanted to stay in Vermont. But it looked as though if we were going to be financially successful, we were going to have to move out of the state.”

Fortunately, Russell had been listening to his father talk about the benefits of captive insurance at the dinner table since the early ’90s. So after finishing school, he joined a Montpelier law firm and began representing and advising “single-parent” and group captive insurance companies.

For many of Russell’s colleagues in the industry, working in captives is a way to make a living while maintaining a more traditional Vermont lifestyle.

“One of the captive examiners is a dairy farmer in Randolph,” Russell said. “The cows would have gone long ago if it weren’t for the captive insurance money.”

Lincoln resident Trish Shepard helps her husband run Shepard Maple Productions when she’s not working as an account executive for AIG’s captive management firm in Burlington.

“I have to live in Vermont for my sugaring,” she said. “(Captive insurance) just opened up another type of industry for accounting jobs.”

So why has the captive insurance industry been so successful in Vermont, of all places?

Mark Young believes it’s because of the small size and approachability of the state government. Companies with captives can come to Vermont and visit with the deputy commissioner of insurance in Montpelier, sit in on the legislative session and easily get access the governor.

Towle agreed the cooperation between the Vermont Legislature and captive insurance industry has been crucial to making the sector as strong as it is today.

“We’re all really proud of this industry,” he said. “It’s nice that we’re a leader in something, besides maple syrup and the beauty of Vermont. We’re really involved in this global financial service.”

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