Vermont Captive Insurance Law Changes Include Green Light on Parametric Contracts

Governor Phil Scott recently signed legislation (H.515) into law modernizing Vermont’s captive insurance statutes, including giving captive insurance companies authority to enter into parametric risk transfer contracts.

Other law changes are aimed at simplifying reporting requirements, improving solvency procedures for sponsored cell captives, and clarifying an inconsistency related to the treatment of affiliated business in sponsored cell companies.

Parametric risk transfer contracts are becoming commonplace as another form of protection for catastrophic events. A parametric contract pays a sum certain upon the occurrence of certain quantifiable events such as a hurricane of a specific category hitting a specific area, regardless of whether the contract holder incurs a loss. In contrast, a traditional insurance contract requires that the policyholder incur and prove a loss, and the amount is subject to adjustment.

“Although purely parametric contracts are not considered insurance due in large part to that distinction, the contract is a useful risk management tool,” said Deputy Commissioner David Provost, Department of Financial Regulation (DFR), “and there are safe harbor features that can be built into the contract to qualify it as insurance.”

According to Provost, organizations use captives for “all types of risk management tools, not just insurance, so it will be helpful for companies to have explicit authority for their captive to enter into parametric contracts.”

Additional changes in this year’s captive legislation include:

• Simplified Reporting – Removes the requirement that fiscal year filers complete a special calendar year report and now requires a simpler report for premium tax reconciliation on a fiscal year basis. Roughly 15% of Vermont’s captives file on a fiscal year basis.
• Delinquency Procedures – Improves delinquency procedures for when either a sponsored cell company or an individual cell becomes insolvent. The change authorizes the DFR to efficiently deal with the affected cell without impacting the solvent cells or limiting current authority.
• Treatment of Affiliated Business in Cells – Removes inconsistencies in current statute, making it clear that cells may insure the risks of one or more participants, or, subject to Commissioner approval, other parties not affiliated with the participants.
• Consolidations – Removes “consolidations” from 6006a, which is meant to deal only with captive mergers, not consolidations.

Captive insurance, a form of self-insurance, has been a part of the Vermont insurance industry since 1981.

Topics Vermont