Captive But Dangerous?
Vermont's emergence as the main base in the United States for captive insurance entities has been touted as one of the state's great economic-development achievements of the past 30 years. But a report in Tuesday's New York Times raises questions about the wisdom and sustainability of that achievement.
A total of 919 captive insurance operations are now headquartered in Vermont — far more than in any other state. In fact, this mostly Burlington-domiciled sector is the third-largest in the world; only the offshore financial havens of Bermuda and the Cayman Islands have attracted more companies of this kind. Captives, which are subsidiaries formed to provide insurance to their parent companies, account for an estimated 1400 jobs in Vermont, mainly in banks, law offices and accounting firms. And the nearly $24 million in taxes collected from captives' transactions represents about two percent of state revenues.
Many of corporate America's best-known names have established captives in Vermont, starting with B.F. Goodrich in 1981. In addition to pumping hundreds of millions of dollars through Burlington's financial services sector and generating hundreds of high-paying jobs that the recession did not kill off, the captive industry produces no pollution.
This pretty picture has been smudged, however, by the page-one story in the Times' May 9 edition.
Reporting on moves by many states to get a piece of the captive action, the Times cites "concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims." Critics of the Vermont-led rush to capitalize on captives are charging, the Times adds, that "this is much like the shadow banking system that contributed to the financial crisis."
Confidentiality is one of the hallmarks of the captive industry, the Times notes. Through its pioneering law that has attracted so many captives, Vermont is said to enable them to withhold the sort of detailed financial information that other types of insurance entities are required to divulge to policyholders.
The Times offers a few examples of "complex private insurance transactions" that raise questions about the degree of risk being encouraged by Vermont and the 30 other states that have become homes to captives. In an interview with Seven Days, the state official in charge of overseeing the captive sector argued that the Times exaggerated the supposed dangers, misconstrued standards of secrecy and failed to recognize the rigor of Vermont's regulatory process. The captives "pose no additional risk to policyholders," said David Provost, deputy commission of the Banking, Insurance, Securities and Health Care Administration (BISHCA).
Provost noted that Vermont has rejected some applications to host captives. If a proposal "isn't wrapped up the way everyone wants it done, then it's turned down," he said. Setting up a captive in Vermont is "not a slam dunk," Provost declares.
Dan Towle, BISHCA's director of financial services, adds that Vermont presents an image of probity that initiators of captives appreciate. "They want to be regulated by us," Towle says. "When someone forms a captive, they're putting their own capital at risk, so they want close regulation."
Vermont's law governing captives, enacted 30 years ago, has served as "pretty much the gold standard" for the states that subsquently sought to tap into the industry, Towle says. The Vermont model is emulated in part because it's so "stringent," he suggests.
In essence, however, Vermont and its imitators have been offering "a refuge from other states' insurance rules," the Times story points out. And a few states, such as California, remain reluctant to follow Vermont's lead. The Times quotes the Golden State's insurance commissioner, Dave Jones, as voicing worries about "systems that usher in less robust financial security and oversight."
