2018 Vermont Report

Vermont: A Domicile For Captive Innovation

Cyber, trucking and terror risk in property are finding alternative risk homes.
By: | April 9, 2018 • 6 min read

As America’s largest on-shore domicile for captive insurance, and one of the first, Vermont is home to some of the oldest and largest captive insurance companies, as well as some of the country’s most knowledgeable and experienced regulators.


It is a combination that provides a hospitable environment for captives looking to innovate in a rapidly changing world.

“Vermont’s been doing this for 30 years, so the regulators have the experience,” said Brady Young, president and CEO, Strategic Risk Solutions.

“They can sniff out a deal or some structure that doesn’t make sense, and if they don’t like it, they’ll let you know. But if it makes sense, generally they’re pretty supportive of letting people do it.”

That regulatory culture is evident in Vermont’s relatively open mind toward captive innovations in response to a number of emerging risks as well as emerging opportunities — like the growing trend of companies seeking to transform their captives from a cost center to a profit center.

“They’ve built up a surplus in a captive over the years, because very often companies will price their premiums at market rate,” said Dave Provost, Vermont’s Deputy Commissioner of Captive Insurance.

“They’re in a captive because they think they’re not getting a good deal in the market and so they do build up profits over the years.” Once a captive has built up that surplus, Provost said, the owner has a dilemma: “What do we do with it?”

Increasingly, the answer is to expand the captive’s offerings to include insurance products for clients, members, suppliers, etc., which are outside the company but related to it.

Avenues of Expansion

“States like Vermont have the flexibility to say, ‘Look if it’s controlled and related to your business — and the keywords are controlled and related — we’re comfortable that the risk that you’re putting in your captive is in a good business and solid business.’ They are supportive of allowing companies do it,” said Young.

Bill Mourelatos, managing director, Captive & Insurance Management, Aon Global Risk Consulting

Such expansions often take the form of extended warranties and service contracts.

“When it comes to vendors and suppliers, there is an opportunity for an owner of a single-parent captive to offer some insurance products to unrelated parties that they work closely with,” said Provost.

“We call it controlled unaffiliated business. You may not have legal ownership control, but you’ve got some effective control. If you’re either their largest customer or their largest supplier, you can exert some influence on them, and if you can do that, then you might be able to share risk with them in your captive.”

Other innovations arise in response to emerging risks from technology or sociopolitical developments.

“Captives have been insuring terrorism risk since 9/11,” said Bill Mourelatos, managing director, Captive & Insurance Management, Aon Global Risk Consulting.

“One advantage of putting some of the risk into a captive is that they can participate in the federal backstop or the TRIA Program. But I think another innovation, at least with terrorism, is that they’re including nuclear, biological, chemical and radioactive cover, which typically is excluded from commercial coverage,” he said.

“Since the federal government started backstopping terrorism insurance, captives have been utilized by property owners and other businesses, both large and small, that have a lot of risk in that area,” said Richard Smith, president, VCIA.

This is particularly helpful for utilities or high-profile real estate that might otherwise have trouble finding coverage.

“A major office building near Broadway sold for $800 million to a group of investors,” said Young, citing one example.

“Since the federal government started backstopping terrorism insurance, captives have been utilized by property owners and other businesses, both large and small, that have a lot of risk in that area.” — Richard Smith, president, VCIA

“They couldn’t find $800 million in terrorist protection. It wasn’t even a question of price, they just couldn’t find it, because everybody that writes property insurance for office buildings was already loaded up. We worked with them to use their captive to solve that problem.”


Captives are often formed in response to risks that insureds feel aren’t accurately understood or priced by the marketplace.

“Everyone obviously is talking about cyber in every facet of business these days,” said Mourelatos.

“I think the captives will have a part in providing coverage in cyber, either through a gateway to the reinsurance markets or by retaining certain levels of risk.”

“Putting cyber coverage in your captive is something that the Vermont regulators are very open to and adept at approving,” said Smith.

“There are certainly a lot of products in the traditional insurance world that people are accessing, but many people prefer to put cyber within their captive program because of the flexibility and better understanding of their own risk profiles.”

New technologies like self-driving cars bring other challenges and, with them, captive innovations.

“The things that make it difficult for an insurance company to operate will all be present with driving cars: no pricing model, no certainty of where things attach, no history of court cases.

If it’s a completely self-driving car, who’s responsible? If it’s a partially self-driving car, what responsibility does the driver, if there is somebody identified as the driver, have? Even identifying ‘who’s the driver?’ If the car came to pick you up, who owns the car? So there’ll be a lot of questions and that will create some opportunity for captives,” said Provost.

Mourelatos agreed: “With the self-driving vehicles, captives will be at the forefront, because like anything, when there is a risk that tends to be somewhat unknown or uninsurable, it tends to go self-insurance first before the commercial markets get in,” he said.

“They understand the algorithms and the risks better than the commercial markets.”

Emerging Opportunities

Technologies like blockchain and cryptocurrencies are also sparking innovations among Vermont’s captives.

According to Smith, captive owners as well as traditional insurers are exploring the use of blockchain to protect important policies and documents that flow between organizations and clients.

Richard Smith, president, VCIA

“Vermont has actually been leading in terms of creating the structure for institutions to use blockchain for records management,” said Smith.

“Is there a place for captives as a tool to help mitigate the risk within a blockchain program? That is an area that we’re looking at very closely.”

Similarly, while the industry explores the use of cryptocurrencies for premium or claims payments, there may also be a role for captives in insuring them.

“We have had some discussions with cryptocurrency markets about ways that captive insurance might help indemnify some of their risks, in the event of some sort of market failure or loss,” said Smith.

Smith has discussed the area with Vermont’s lead regulators.

“They are open. They’re interested,” he said. “They’re going to be careful … to see where this goes, but they definitely are willing to have discussions about it.”

Other developments that may present a niche for captive innovations include the marijuana industry and its unique legal status.

“These owners are depositing their cash typically in a bank account, but most federally chartered banks will not take their money, so state-chartered banks are stepping up, but they’re not getting the FDIC Insurance and that’s where captives are being formed to provide that insurance,” said Mourelatos.


“And that’s just one aspect. So I think there’s going to be a lot of captive play in the marijuana industry just because commercial insurers don’t have necessarily an appetite and because of the contradiction in the federal law.”

More mature sectors also turn to captives in response to issues with supply or pricing in the marketplace.

“Trucking and transportation-related risk is a challenging area right now,” said Young.

“Prices are going up, supply is going down, and clients are being forced to take more of the risk themselves.”

He cites a similar dynamic in liability and workers’ compensation coverage for nursing homes. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.


That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.


Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]