Regulations have long been a barrier to innovation for insurance companies. Rigid rules limit their ability to effectively test new products and technologies with room to work out the kinks. Innovation requires flexibility and an understanding that companies need the option to fail safely in order to learn and improve without fear of severe financial or legal repercussions.

Vermont has a long history of striving to create that environment for both its captive and traditional insurance companies. In 1981, Vermont became one of the first states to create captive-enabling legislation and since that time has been at the forefront of the captive insurance industry.

“We were the first to recognize that the captive industry had great growth potential and would be a boon for economic development in Vermont,” said Sandy Bigglestone, Director of Captive Insurance for the Vermont Department of Financial Regulation.

In the 40 years since, the state’s regulators have continually worked with business leaders to both learn what they need and enable the flexibility to make it happen. Today, Vermont is a domicile for various captive types, including everything from single-parent and group captives to risk retention groups and affiliated reinsurance companies.

Similarly, these captives have been given space to innovate new products that address a host of emerging risks and test the implementation of new technologies designed to streamline the insurance process.

However, flexibility never comes at the expense of quality.

“Regardless of how innovative a proposal may be, one of the things that we always value is improved risk management and risk financing. We never lose sight of what our fundamental standards are for captive insurance,” said Michael Pieciak, Commissioner, Vermont Department of Financial Regulation.

Two recent initiatives demonstrate the culture of innovation and excellence that Vermont continues to foster for the insurance industry:

1. A Regulatory “Sandbox” Gives Insurers Space to Experiment

Michael Pieciak, Commissioner, Vermont Department of Financial Regulation

Traditional insurance companies have been hard-pressed to keep up with rapidly changing consumer demands and expectations. People want on-demand coverage tailored to fit their needs. They want more convenience and expediency in the quoting and binding process. They sometimes want that process automated so they can serve themselves.

Unfortunately, “some of the products that insurers might want to offer that adapt to those demands don’t fit well within our traditional framework of insurance statutes and regulations,” Pieciak said.

This year, Vermont implemented a “regulatory sandbox” which allows insurers to pilot new products or services with reduced risk. Often, these are traditional incumbent carriers interested in creating a new subsidiary, finding a new way to deliver products, or testing a new product altogether.

“They can sell or offer the product to up to 10,000 Vermonters for a year. It’s a good sample size for them and allows us to monitor how the product is working out, what the claims look like, and what the experience is for consumers,” Pieciak said.

“It really provides companies the opportunity to come in and tell us what it is about our regulatory process that’s preventing them from offering a particular product in Vermont. It allows us then the flexibility to waive those requirements for a limited period of time and for a limited number of Vermonters while the program is piloted.”

If all goes well, regulators will approve the new product and allow insurers to offer it to a broader market with full licensure.

This doesn’t mean, however, that the 10,000 pilot customers are exposed to greater risk. Every company offering a product or service through the sandbox must put aside a statutory deposit to cover any expenses arising from an event that causes harm to consumers.

“Consumer protection is always the top priority,” Pieciak said.

2. A Blockchain Pilot Aims to Increase Ease of Doing Business

Sandy Bigglestone, Director of Captive Insurance for the Vermont Department of Financial Regulation

The regulatory sandbox gives companies a way to test new technologies and methods, but the State of Vermont is equally interested in exploring these technologies to improve internal processes that ultimately benefit businesses as well.

Earlier this year, Vermont’s Department of Financial Regulation approached the Secretary of State’s office to create a blockchain pilot program designed to digitize the registration process for new captives applying for licensure.

“Right now, we’re using a traditional paper-based approach for certain required documents that need to be filed with the Secretary of State when a captive insurance company is being licensed,” Bigglestone said. “One of our goals with the blockchain program is to provide new captive entities with a secure digital option to complete their registration.”

The program will test how blockchain can be utilized for a sample of 20 to 40 transactions. For example, any changes in a captive entity’s bylaws or corporate documents filed with the Secretary of State would be captured, applied, and accessed on the blockchain.

“We’re hoping that this pilot project will allow enough compilation of data to evaluate the effectiveness of deploying blockchain technology in other areas of state government, including the processes and procedures used by the captive insurance division,” Bigglestone said.

The ultimate goal is to increase efficiency and transparency which creates a better experience for businesses, helps to avoid errors common in paper-based procedures, saves costs, and perhaps even encourages more companies to consider domiciling their captive in the State of Vermont.

Dedication to Innovation Drives Success

In the 40 years since it passed the Special Insurer Act, Vermont has licensed over 1,100 captives and is home to nearly 600 active captives today. A combination of efficiency, speed and responsiveness along with regulatory flexibility helps to create an environment that businesses keep coming back to.

Both traditional and captive insurance companies that have done business in other states have reported a higher quality of regulatory service in Vermont.

“We had a company that re-domiciled here three years ago that said it was the best business decision they made in the last decade because of the quality of the regulatory approach that we have,” Pieciak said.

Importantly, that approach includes listening. Rules aren’t finalized and handed down without input from the community they are meant to serve. “That’s what differentiates us. We listen to our regulated entities and are open to working with them to make changes,” Bigglestone said.

This approach produces benefits for every stakeholder. Captives and traditional insurers are given the freedom to innovate, which ultimately produces coverages and services that consumers want and need. Insurance providers, customers, and the State all benefit from spurred economic development.

“We’re always looking to the future,” Pieciak said. “Our dedication to innovation and forward-thinking is one reason why Vermont is considered the gold standard domicile in the captive insurance industry.”

To learn more, visit www.VermontCaptive.com.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.