How about a snapshot-sized look at the state’s obscure captive insurance industry?

Briefly, a captive insurance business is an insurance risk business controlled by a parent company.  Worldwide Vermont places first with $135.4 billion assets under management and has the third largest number of licensed captive insurance entities. The traditional corporate tax havens of Bermuda and the Cayman Island are first and second. In Vermont it’s big, operates largely below the day to day radar, and changes are afoot.

Frequent regulatory tweaking of often little-noticed rules is standard procedure in this business segment. Revisions are so common that the director of the financial services in the Vermont Department of Economic Development recently said  “I think our enhancements to our captive law are an annual tradition,”  

Contrasting starkly with what might be expected from regulators, especially after recent insurance and banking horrors, are accommodating remarks explaining how easily these changes happen. Speaking of recent changes undertaken David Provost, Vermont's deputy commissioner of captive insurance said

“Basically this was something that the industry requested. They[the industry] wanted to see the option to have incorporated protected cells.”

And they must want tax credits too! New laws will make permanent a first year premium tax credit of $7,500.00 per entity which had been temporarily in place for 18 months

Captive insurers as portals to cheap bank credit?

Captive insurance corporations are financial risk management insurance companies which insure investments of parent companies. Captive cells and individual cells are separate enterprises but through various forms of entanglement remain connected with their captive or sponsor partners. Changes to the regulations governing captive insurance cells are in the works; tucked into bill H.468. Current restrictions on cell businesses will be eliminated and replaced by enhanced discretionary power to be wielded by the commissioner .

This change will eliminate the current restrictions on cell business. Business written by a sponsored captive will no longer be required to have it be fronted, reinsured or secured by a trust. This requirement will now be at the discretion of the commissioner.  

While Vermont modifies certain regulations, captive insurers may soon take advantage of an interesting quirk in the Federal Home Loan Bank Act of 1932.

Federal Home Loan Bank Act allows companies to use their captive insurers as portals to cheap bank credit. A budding concept is for captive owners, nonbank companies included, to use their captive insurers as portals to cheap bank credit under a federal banking law enacted decades before the first captive appeared.

While captive experts do not foresee the arrangement transforming captives into profit centers, some say it could enhance a facility's liquidity and claims-paying ability or assist its parent company in accessing tough-to-find credit or lowering borrowing costs  

Vermont’s deputy commissioner Provost is reported to be cool on this concept and suggests the federal housing agency was misinformed about the nature of captives. Provost and a regulator from Delaware’s captive insurance commission think federal home loan bank would quickly reject a captive or any applicant that fails the asset test.

— Provost mentions the need for “a lot more information” before he would support it but appears to leave the door accommodatingly ajar for Vermont’s 900 captives.

He said parent companies could find better ways to line up credit but that he would consider allowing it if he was shown that the parent faced problems obtaining credit.