Burlington Standard

Agency of Commerce and Community Development issued the following announcement.

New Legislation Makes Clear the Acceptable Use of Parametric Contracts as Risk Management Tool

Montpelier, Vt. – Governor Phil Scott signed new legislation into law modernizing Vermont’s captive insurance statutes and removing inconsistencies. This year’s bill, H.515, proposed several updates to Vermont’s captive insurance law, including the ability for captive insurance companies to enter into parametric risk transfer contracts, simplifying reporting requirements, improving solvency procedures for sponsored cell captives, and clarifies an inconsistency related to the treatment of affiliated business in sponsored cell companies.

“Vermont is always looking to improve its laws to better meet the needs of captive insurance companies, while improving the quality of our regulation,” said Governor Phil Scott. “This year is a great example of that.”

Included in the captive bill this year was the passage of specific legislation that would allow for captive insurance companies to enter parametric risk transfer contracts. Parametric risk transfer contracts are becoming common place as another form of protection for catastrophic events. A parametric contract pays a sum certain upon the occurrence of certain quantifiable events (e.g., a hurricane of a specific category hitting a specific area), regardless of whether the contract holder incurs a loss. In contrast, an insurance contract pays an amount upon the occurrence of the same or similar events, but the insurance policy holder must 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. Organizations often use captives as a central repository 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.”

“Vermont continues to take industry ideas and really consider those ideas,” said Kevin Mead, President of the Vermont Captive Insurance Association. “I’m glad that we could work together to make it easier for captive companies to utilize another risk management tool.”

“Parametric risk transfer is the solution for systemic and emerging risks. The symbiosis of capital markets and index-blockchain-based solution is a great step into the future and Vermont lives up to its pioneering role in the captive industry,“ said Marcus Schmalbach, Founder and CEO, RYSKEX Inc. “Parametric Risk Transfer finds its home in the Gold Standard Captive Domicile of Vermont.”

Additional changes include simplifying reporting requirements, improving delinquency procedures, and ensuring consistency in language for the treatment of affiliated business in cells and consolidations. 

“These smaller changes, when added up year after year, make all the difference for captive insurance companies,” said Brittany Nevins, Captive Insurance Economic Development Director. “Vermont continues to be proactive and ask, ‘what can we do to be better?’ This is central to our industry culture in our state.”

A summary of the changes in the law includes the following:

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.

For more information on Vermont’s captive insurance industry, visit www.vermontcaptive.com, call Brittany Nevins at 802-398-5192 or email Brittany.nevins@vermont.gov.

About Vermont Captive Insurance

Captive insurance is a regulated form of self-insurance that has existed since the 1960’s and has been a part of the Vermont insurance industry since 1981, when Vermont passed the Special Insurer Act. Captive insurance companies are formed by companies or groups of companies as a form of alternative insurance to better manage their own risk. Captives are commonly used for corporate lines of insurance such as property, general liability, products liability, or professional liability.

Original source can be found here.