Why Vermont Captives Are a Natural Fit for Weathering Property Insurance Storms

For companies facing expensive and hard-to-insure property perils, captives offer flexibility and price stability.

By: David Agnew | May 16, 2024

It’s been an interesting few years for the property insurance market, to put it mildly. Inflation, climate change, the transition to sustainable energy and shrinking capacity in reinsurance markets have all contributed to rising premiums; McKinsey puts the increase at between 6 and 8% for each year since 2018 across all global P&C lines, and most property lines in the U.S. have seen even sharper spikes.

This volatility has prompted some carriers to pull out of certain markets entirely. Seven of the largest home insurers have scaled back or stopped insuring homes in California, largely due to wildfires; major carriers have scaled back or pulled out of Florida due to hurricanes; and Louisiana faces a crisis as carriers cut capacity after a series of floods and hurricanes dating back to 2020.

“Usually, businesses are coming to us with a problem,” said Eric Funk, captive senior accounting manager at NFP’s Risk & Insurance Strategy Collective (RISC). “Right now, that problem tends to be property, because they’re seeing a cutback of capacity in the market. And they’re seeing huge increases — double digits, up to 30%.”

But with a captive, Funk said, “you can start building capital up to then use as a risk management leveraging tool, because once you have it set up, you can even use it to cover risks that are now being excluded — like CAT coverage, whether it’s hurricanes in the Gulf Coast or earthquakes in California.”

Jonathan Spencer, assistant chief examiner, State of Vermont’s Department of Financial Regulation Captive Insurance Division

Jonathan Spencer, assistant chief examiner with the State of Vermont’s Department of Financial Regulation Captive Insurance Division, agreed: “More and more people are seeing the potential benefits of a captive program. Especially in a hardening market, you’re no longer at the total mercy of the commercial market.”

Property and captives are a natural fit, according to Steve Bauman, global programs & captives director, Americas, AXA XL. “Companies have a long history of using their captives for property,” he said. “When a hard market comes about — and we’re in the throes of a hard market — that’s the perfect opportunity for insureds to use their captive for property.”

Smoothing the Road Ahead

There are several ways captives can help risk managers improve their property programs, and naturally, cost is chief among them. By avoiding the wild swings in capacity and pricing in the traditional market, captives confer a degree of consistency.
This is especially true where carriers are pulling out of markets.

“A lot of capacity that’s come into the marketplace in the last several years is captive utilization,” Bauman said. In previous hard cycles, he explained, “new insurance companies and new capital came pouring into the market. This one has been a bit different … This [hard cycle] seems a bit more muted in terms of new entrants. But what you have seen is the stepping up of captive utilization to fill that void.”

And, over the longer term, these captives can achieve their ultimate goal: lower premiums. By creating a vehicle in which to retain risk, captives give companies an alternative to paying whatever the traditional market demands.

TJ Scherer, VP of Spring Consulting Group

“You now have leverage with the market, because you aren’t relying solely on the market,” said TJ Scherer, VP of Spring Consulting Group. “You could say, ‘At this price, I will transfer the risk. At this price, I will not.’ You’re leveraging your captive as a new retention vehicle — and you may not do that in year one or year two, but over time, it becomes part of your overall strategy and leverage with the market.”

In fact, “leverage” is the watchword for property captive use, giving risk managers the flexibility to choose which risks to retain and where, generating savings and even profit.

Fits Like a Glove

For instance, when carriers respond to unexpected catastrophes by introducing large exclusions or buydowns, captives are able to retain that risk and keep properties in compliance. If a solar farm faces a wind exclusion following a string of claims, for instance, a captive can step in to fill that gap.

Theresa Severson, VP of insurance & risk, Kite Realty

Theresa Severson, VP of insurance & risk at Kite Realty, a large REIT, explained that “40% of our portfolio is in wind Tier 1, so hurricanes are a definite exposure for us. But we also face convective storms.” As a result, she said, “I look at our philosophy as being captive-centric, always starting captive-forward. But we also will react to what the market is offering. Our modeling shows us where we have expected losses, and when I look at the premiums they’re offering in the standard market, if it makes sense to buy it through a third party, then we’ll go that way. If what they’re offering us from a coverage and pricing standpoint doesn’t make sense based upon my modeling, then I’ll put it into the captive and manage it that way.”

Captives also offer the advantages of hands-on attention and speedier outcomes, some of which are due to the domicile in which they’re licensed.

“Vermont is very easy to work with,” Severson said. “They’re understanding. They respond very quickly to questions. I’ve always had a really good working relationship with Vermont.”

Skin in the Game

As companies with a captive realize savings, they often undergo a change in culture as well: No longer can they simply pay their premiums and expect an insurer to take care of whatever claims may arise. Rather, risk engineering becomes a way to grow a surplus of funds, and even potential dividends.

Steve Bauman, global programs & captives director, Americas, AXA XL

“There’s greater motivation to try and curb [loss],” Bauman said, and that money can then be reinvested into property resilience. “Many captives loan money back to their parent,” Bauman explained, “and that money can then be used to enhance loss-control efforts. If a risk manager knows they have some significant funds in their captive, they can, for example, put sprinklers in a building that didn’t have them. [That’s] a great benefit where budgets are tight.”

And the ways to predict and prevent property losses are endless: investing in flood barriers and sensors, RMIS and software to parse risk data, to name just a few.

“You can use the funds that your captive has built up to help fund some of those loss-control initiatives, if it’s something that impacts the overall loss ratio for the captive,” Severson said. “We have a system called Hail Alert that will send us notifications of hail events that happened at any of our centers and tell us the size of that hail … We can then go ahead and be proactive, see if there’s any damage, and make any repairs that we need.”

For risk managers trying to build resilience measures into a budget, a captive can help higher-ups see the benefit of a proactive approach. It can also ensure they’re part of the conversation in the first place.

“Having a captive gives me a seat at the table when it comes to the C-suite and even the board, because I’m reporting to our board with regards to the captive and how it’s operating. It’s a way of putting a bigger lens on your risk initiatives,” Severson said. “When you have that skin in the game, it is much easier to get buy-in for different safety initiatives, loss-control initiatives or risk management initiatives within the organization, because we really are talking about our own money.”

It can even help get buy-in from the front lines: “It’s a little bit different when you’re talking to the boots-on-the-ground people, the property managers, and explaining to them that this is our money,” she added.

A Journey Begins

Eric Funk, captive senior accounting manager, NFP’s Risk & Insurance Strategy Collective (RISC)

They say the best time to plant a tree was 20 years ago, but the second-best time is now. The same is true of starting a captive: Companies whose captives are fully mature will be gratified they have options when navigating today’s property insurance market, but for those still facing rising premiums and exclusions, it’s never too late. And because captives aren’t a one-size-fits-all solution, they can start small and grow over time, helping to address a company’s ever-shifting pain points.

“Taking on more risk is when the captive builds and builds,” Bauman said. Eventually, “captives get to a point where they can take on volatility. It’s got to be very measured, and captives have to lean on their partners.”

In this, there’s no better partner than Vermont.

“They have the depth. They have the expertise. They have the legislation,” Funk said. “They’re the biggest and best in the world for a reason.” &

David Agnew is an editor based in Philadelphia. He can be reached at [email protected].

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

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.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.