Frequently Asked Questions
Captive vs. Traditional?
Commercial insurance companies sell insurance to the general public and are licensed in all states in which they do business. By contrast, captive insurance companies insure only their owners, who are sophisticated entities with the ability to manage and retain their own risk. Consequently, the degree of regulatory oversight required for captives is different than that which is required for commercial insurers. The captive is licensed in only one state, and operates under the captive insurance law of that domicile.
Why Form a Captive?
One of the chief functions of a captive is to facilitate the efficient financing of risk within an organization. In addition, captives form part of the overall financial planning structure for a corporation; act as a shield against upswings and downturns in the commercial market; serve as a direct insurance company that issues policies to subsidiaries in a group or, can serve as a reinsurance company that assumes risks behind commercial insurers.
Specific captive benefits include unbundled service support; improved cash flow and investment return; reduced overall cost of coverage; access to the reinsurance market; underwriting profit; ability to provide coverage that is unavailable or unaffordable in the traditional marketplace; and coordination of global exposure.
In 1981, Vermont passed the Special Insurer Act, which was designed to provide an attractive environment for the formation of captives. Since that time, the industry and state have worked continuously to modify and enhance the original legislation. This has allowed Vermont to retain its premier position as the largest onshore domicile.
Vermont is the largest on shore domicile. It is the second largest in the world in assets and third largest in the world in number of licenses.
Some views of Vermont from industry experts:
- Vermont's state government is educated, aware and responsive to captives and RRGs;
- The industry's infrastructure is among the most sophisticated and mature networks in the world;
- Service providers form a support network that is without peer;
- Low incorporation, administration and management costs;
- The best regulation, the most developed infrastructure, and the highest degree of flexibility and innovation available to those wishing to domicile onshore.
Economic Impact on Vermont:
Vermont's captive insurance industry generates more than $23 million in premium taxes to the State's general fund, and accounts for over 1400 direct and indirect jobs (full and part-time). Based on an economic impact report commissioned by the State of Vermont, the captive industry also is an important factor in the state's banking and financial sector with over $1 billion in funds held at Vermont's banks, financial companies and investment managers.
*Source: VT Department of Economic Development