2017 Vermont Report

Vermont Eyes Agency Captives

An agricultural consortium is one group taking a serious look at forming an agency captive in Vermont.
By: | April 7, 2017 • 6 min read

Agency captives have become increasingly popular in recent years, with more and more large associations with hundreds or even thousands of members looking to insure themselves.

Advertisement




Vermont, the leading domestic captive domicile, is currently working on legislation to allow them and could see it approved in a month.

An agency captive is essentially a reinsurance company owned by an insurance agency or brokerage that works through an agreement with a fronting carrier, whereby the captive receives a share of all premiums written and retains any investment income, but in return it has to pay a portion of the claims.

Most agency captives write business owner policy, package, general liability, errors and omissions, workers’ compensation and auto liability.

The concept of an agency captive or producer-owned reinsurance company (PORC) is nothing new; they have been around for several years, but few domiciles were willing to register them after they came under scrutiny from the Internal Revenue Service (IRS) and other regulators.

The problem was that under the PORC structure, producers could recommend a particular policy to a client because it generated an underwriting profit for its company rather than being the most suitable policy for that client.

David Provost. deputy commissioner, Captive Insurance Division, Vermont

It also allowed the producer to cherry-pick the best risks for its own PORC and offload the poorer risks to other carriers, as well as the model being used in fraudulent schemes.

“That’s why we will have a clear preference for an agency/producer that is working with program business and/or is owned or affiliated with the ultimate buyers, such as an association or other homogenous group of risks,” said David Provost, deputy commissioner for Vermont’s Captive Insurance Division, who tabled a proposal to register agency captives in a captive bill in January.

“Our proposal limits this to commercial insurance business — we are not likely to see heterogeneous risk being placed.”

Vermont Launch

The bill has already received the green light from the House Committee on Commerce and Economic Development, but it is still awaiting approval for a tax credit included within the bill from the Ways and Means Committee. Provost, for one, doesn’t anticipate any problems.

“I don’t anticipate that we’ll have any trouble getting it passed before the legislative session ends in May.” — David Provost. deputy commissioner, Captive Insurance Division, Vermont

“This year we decided to put forward a proposal to make it law in order to open the door to potential business,” he said.

“I don’t anticipate that we’ll have any trouble getting it passed before the legislative session ends in May.”

Similar to a group captive, instead of being owned by the group members, it is owned by an insurance agency such as an MGA or a program administrator, and the group business is placed with an insurer backed up by the captive as a reinsurance company, said Provost.

Advertisement




“That is exactly the kind of business that we are looking for — a group program with a captive to share and participate in the risk, and potentially the profits, as well as sharing best practices and other risk mitigation strategies,” he said.

“This should achieve a virtuous cycle where the group drives down costs, in turn generating profits which can then be returned to its members in the form of either a dividend or put back into cost control.”

“Working closely with our members we are able to better understand and mitigate against the risk, which ultimately helps control claims costs.” — Jan Klodowski, vice president at Agri-Services Agency

Provost said that, if granted approval, an agency captive would also be regulated in the same way as a group captive; required to provide an annual statement, actuarial review and audited financials, as well as undergoing a thorough review of its forms and contracts to ensure the policy is fit for purpose.

“The key to an agency captive is to ensure that there is full disclosure of all business placed to the members that are paying the premiums, and that they get the full benefit of the captive,” he said.
“In the case of the group captive, if it is generating a profit it is important that this is applied to the captive’s risk management strategy to drive down costs.”

Provost said that since announcing the proposal, Vermont started receiving an uptick in interest in agency captives.

“I don’t expect it will be a flood of applications, but we are probably going to see one or two a year.”

Provost added that an agency captive was perfect for large associations with difficult to place risks such as agricultural risks.

“It’s a lot easier to place that kind of risk if you have 500 or 1,000 policyholders than one or two,” he said.

“If you have got volume and a premium and it can be turned into something that is mutually beneficial and profitable for both the members and the insurer.”

Association Application

Agri-Services Agency (ASA), a wholly owned subsidiary of Dairy Farmers of America, formed more than 30 years ago to provide affordable insurance programs to its thousands of members and affiliated agricultural producers before being changed to a sponsored cell captive, similar to the agency captive model.

ASA started the Agrisurance Inc. captive in Vermont to provide consistent workers’ compensation for agricultural production companies that were struggling to secure coverage and was quickly extended to supporting businesses.

It’s considering moving to the agency captive model if and when Vermont legislators approve the structure.

Jan Klodowski, vice president, Agri-Services Agency

“We knew that we had to reach a broad group of people and we wanted to be able to stabilize the pricing as well as have a consistent workers’ compensation program available for agricultural production and agricultural types of business,” said Jan Klodowski, vice president at Agri-Services Agency.

“To our members our program looks like a traditional insured’s, but we don’t have the same fluctuation in pricing even though we follow the state recommendations.

“And because we have that pricing flexibility we have been able to work with our members more effectively in investing the money back into developing safety programs.”

Klodowski said that at the time of setting up the captive, Dairy Farmers of America opted for a model that it could understand and favorably predict where its losses were going to be and price accordingly.

During the good years, any profits made were plowed back into value-added services for the program and into expanding the captive’s loss control team of agricultural experts, she added.

Advertisement




The captive, which had an underwriting combined ratio of 87 percent at the end of 2016, also has a claims manager and analyst onsite, said Klodowski. “When we have catastrophic losses as a result of serious accidents, we work closely with the employer and employee concerned to provide them with access to the best medical care.”

“Working closely with our members we are able to better understand and mitigate against the risk, which ultimately helps control claims costs.”

Gary Osborne, president of USA Risk Group, whose company has managed many agency captives and who advocated for agency captives for Vermont more than 10 years ago, said that from his experience, the most successful ones were individual agencies with a niche that allows for customization and specialized cover that forms a market.

“Specialized programs should be the target,” he said. &

__________________________________________________

2017 Vermont Report

A Perfect Fit

Life Time Fitness finds a captive home in Vermont.

Eight Questions for Dan Towle  

Risk & Insurance® speaks with Dan Towle as he departs from his long tenure as director of financial services for the State of Vermont.

 

 

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Absence Management

Establishing Balance With Volunteers

It’s good business to allow job-leave for volunteer emergency responders, whether or not state laws apply.
By: | January 10, 2018 • 7 min read

If 2017 had a moniker, it might be “the year of the natural disasters,” thanks to a phenomenal array of catastrophic or severe events— hurricanes, tornadoes, wildfires, ice storms and floods.

Advertisement




Combined with smaller-scale fires and other emergencies, these incidents tax the resources of local and state emergency services, often prompting the need to call volunteer emergency responders into action.

But as lean as most organizations are already running, volunteer activities can sometimes cause friction between employees and employers. Handling conflicts the wrong way can potentially lead to legal headaches, harm employee morale and batter a company’s reputation.

State by State Variations

Most employers are aware of the various federal and state leave laws protecting their employees, including family and medical leave, pregnancy leave and military leave. But leave laws that protect the livelihoods of volunteer emergency responders are more likely to fly under the radar of some HR managers and risk managers.

Such laws don’t exist in every state, but more than 20 states do have some type of law in place to protect volunteers including emergency responders, firefighters, disaster workers, medical responders, ambulance drivers or peace officers.

Marti Cardi, vice president of Product Compliance for Matrix Absence Management

The laws vary broadly. Nearly all specify that such leave be unpaid, and that employees disclose their volunteer status to employers and provide documentation for each leave. But there is a spectrum of variations in terms of what may trigger an eligible leave. Some, for instance, apply for any emergency that prompts a call from the volunteer’s affiliated responder group. Others may require a government declaration of emergency for the law to be triggered.

While many of the laws do not explicitly require employers to let employees leave work when called to an emergency during a shift, most specify that an employee may be late or even miss work entirely without facing termination or any other adverse employment action.

Some states mandate a maximum number of unpaid leave days that a volunteer can claim. But others may place more significant burdens on employers. In California, for instance, employers with 50 or more employees are required to grant up to 14 days of unpaid leave for training activities in addition to any leave taken to respond to emergency events. For multistate employers, keeping on top of what obligations may apply in each circumstance can be a challenge.

Significant Risks

Large or mid-sized employers may rely on absence management providers to keep them in compliance. For smaller employers though, it may be as simple as looking up a state’s law via Google to find out what’s required. However, checking in with the state department of labor or the company’s attorney may be the best way to get the correct facts.

“I would caution that just because you don’t find something [on the internet], it doesn’t mean it’s not there,” said absence management and employment law attorney Marti Cardi, vice president of Product Compliance for Matrix Absence Management.

For example, Cardi said, an obscure Texas law provides job-protected leave for volunteer ham radio operators called into service during an emergency.

Cardi said employers should task HR to investigate the laws in each state the company operates in, and to ensure that supervisors are educated about the existence of these laws.

“If a supervisor is told by one of his or her employees, ‘Sorry I’m not coming in today … I’ve been called to volunteer firefighter duty for the [nearby region] fire,’” she said, you want to be sure that the supervisor knows not to take action against the employee, and to contact HR for guidance.

“Training supervisors to be aware of this kind of absence is really important.”

Advertisement




An employer that does terminate a protected volunteer for responding to an emergency may be ordered to pay back wages and reinstate the employee. In some cases, the employee may also be able to sue for wrongful termination.

And of course, “you don’t want to be the company in the headlines that is getting sued because you fired the volunteer firefighter,” she added.

If an employer bars a volunteer from responding, the worst-case scenario may be a third-party claim. Failure to comply with the law could give rise to a claim along the lines of “‘If you had complied with your statutory obligation to give Jane Doe time to respond, my loved one would not have died,’” explained Philadelphia-based Jonathan Segal, partner at law firm Duane Morris and managing principal of the Duane Morris Institute.

“That’s the claim I think is the largest in terms of legal risk.”

Even if no one dies or is seriously injured, he added, “there could still be significant reputational risk if an individual were to go to the media and say, ‘Look, I got called by the fire department and I wasn’t allowed to go.’”

The Right Thing to Do

What employers should be thinking about, Segal said, is that whether or not you have a legal obligation to provide job-protected leave for volunteer responders, “there’s still the question of what are the consequences if you don’t?”

Employee morale should be factored in, he said. The last thing any company wants is for employees to perceive it as insensitive to their interests or the interests of the community at large.

“Sometimes employers need to go beyond the law, and this is one of those times,” — Jonathan Segal, partner, Duane Morris; managing principal, Duane Morris Institute

“How is this going to resonate with my employees, with my workforce, how are people going to see this? These are all relevant factors to consider,” he said.

There’s an argument to be made for employers to look at the bigger picture when it comes to any volunteer responders on their payroll, said Segal.

“Sometimes employers need to go beyond the law, and this is one of those times,” he said. “Think about the case where’s there’s not a specific state law [for emergency responders] and you say to a volunteer, ‘No, you can’t leave to deal with this fire’ and then people die. You as an employer have potentially played a role, indirectly, because you didn’t allow the first responder or responders to go,” he said.

The bottom line is that “it’s the right thing to do, even if it’s not required by law,” agreed Cardi.

“I feel that companies should have a policy that they’re not going to discipline or discharge someone for absences due to this kind of civic service, subject to verification of course.”

Clear Policy

While most employers do strive to be good corporate citizens, it goes without question that employers need to guard their own interests. It’s not especially likely that volunteer responders will try to take advantage of the unpaid leave allowed them, but of course, it could happen.

That’s why it’s important to have policies that are aligned with state laws. Those policies could include:

  • Notifying the company of any volunteer affiliations either upon hire or as soon they are activated as volunteers.
  • Requiring that employees notify a supervisor as soon as possible if called to an emergency (state requirements vary).
  • Requiring documentation after the event from the head of the entity supervising the volunteer’s activities.

If at some point it becomes excessive – someone has responded to emergencies five times in nine weeks, then it’s time to examine the specifics of the law and have a discussion with the employee about what’s reasonable, said Segal. It may also be time to ask specifics about whether the person is volunteering each time, or are they being called.

Advertisement




In some cases, the discussion may need to be about finding a middle ground, especially if an employee has taken on an excessively demanding volunteer role.

“We encourage volunteers to pick the style that best fits their schedule,” said Greta Gustafson, a representative of the American Red Cross. “Disaster volunteers can elect to respond to disasters locally, nationally, or even virtually, and each assignment varies in length — from responding overnight to a home fire in your community to deploying across the country for several weeks following a hurricane.

“The Red Cross encourages all volunteers to talk with their employers to determine their availability and to communicate this with their local Red Cross chapter.”

Segal suggests approaching it as an interactive dialogue — borrowing from the ADA. “Employers may need to open a discussion along the lines of ‘I need you here this week because this week we have a deliverable on Friday and you’re critical to that client deliverable,’” he said, but also identify when the employee’s absence would be less critical.

No doubt there will be tough calls. An employer may have its hands full just trying to meet basic customer needs and need all hands on deck.

“That may be a situation where you say, ‘First let me check the law,’” said Segal. If there’s a leave law that applies, “then I’m going to need to comply with it. If there’s not, then you may need to balance competing interests and say, ‘We need you here.’” &

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