Future Vision
In the first six months of this year, the State of Vermont licensed 17 new captives. The strongest interest comes from the financial services sector, with five captives formed by insurance companies and two by banking companies. Captive insurers offer a cost-effective means to self-insure the risks of their corporate parents. By insuring the risks themselves, large corporations benefit from more favorable tax treatment as well as the possibility to retain better risks rather than pay premiums to cede the risks to a third-party insurer. Vermont is the largest captive insurance domicile in the United States, offering foreign companies the ability to use their local rules in accounting for their captive insurers, as well as a streamlined formation and approval process. Last year, more than $75 billion of captive insurance premiums were written in Vermont, which volume seems likely to increase this year.
So what does this mean for the small business community? Increases in captive formation typically signal expectations of insurance rate increases. Significantly financial institutions represent most of the Vermont captive formations. With the litigation around the financial crisis, directors’ and officers’ coverage is expected to rise in cost. Small businesses should prepare for future rate increases and, if possible, negotiate renewals now.