I stumbled onto an article through a vtdigger.com link about the captive insurance industry. Before your eyes glaze over, it’s ok – the report goes only a little into the deep weeds of captive insurance. It seems the state of Connecticut, erstwhile insurance capital of the world, is growling and about to take a bite out of Vermont’s profitable captive insurance industry.
Captive insurance is a form of self-insurance subsidiary set up by a large company (such as IBM) to insure the company's own risk. By keeping insurance costs “in house” the savings to corporations are substantial. Vermont is the world’s third-largest domicile of captives with over 900 licensed through the state. Connecticut’s plan, in part:
Connecticut Gov. Dannel P. Malloy is looking for something new in one of the state's oldest industries. His budget proposes to establish a division in the Insurance Department to regulate companies that specialize in captive insurance, a form of self-insurance. Among proposed incentives for luring captives to Connecticut is establishing a $7,500 tax credit for a captive insurer's first year in business and modify[ing] certain requirements.
Okay, competition for the captive insurance dollar. So here’s David Provost, Vermont’s deputy commissioner of captive insurance, on how Vermont keeps its captives captive.
The state has not offered tax breaks or other inducements, but provides a "stable, predictable" business environment,
Surely the Deputy Commissioner must have misspoken or been misquoted in his comments in the article about the secret behind Vermont’s captive insurance success.
Checking out the Vermont BISHCA website, we find there are dozens of “improvements” to regulations and “housekeeping” changes made by the legislature (some at the captives’ request) to accommodate and streamline regulation for the captive insurance industry. The BISHCA website notes one result of “housekeeping” changes in captive insurance laws
Recodified changes […] for the second time since captive law was adopted, allowed for a significant reduction in captive premium taxes
One of the recent legislative changes celebrated last year was making a three-year-old (temporary) tax break permanent. An industry official wrote when the Vermont bill was signed:
The bill also makes permanent the elimination of the first year minimum tax of $7,500 for newly licensed captives. “It was a way for the Legislature and Governor to say thank you to an industry that has been so beneficial to Vermont,” said Richard Smith, President of the Vermont Captive Insurance Association (VCIA).
Coincidently the same $7,500 tax inducement is something the Connecticut Governor is proposing. A seven-thousand-dollar sweetener is a drop in the bucket for this industry. The rule changes may just be the sign of good and flexible captive regulators, but for a deputy commissioner to say that this industry doesn’t get inducements or breaks from Vermont makes the facts rather more “flexible” and elastic than their substance can stand. It isn’t as if Connecticut hasn’t noticed.
The CT tax break would seem to be no threat to Vermont; it’s hard to imagine very many companies uprooting for the sake of $7,500.
However… how long will it be before VCIA approaches the Statehouse with a plea for Vermont to become “more competitive” in order to ensure the industry’s future here? We may be at the beginning of a self-destructive contest with Connecticut.
I have seen the “housekeeping changes” sail through almost every year with little or no serious review. It’s pretty clear who’s captive.