Vermont Adopts Captive Overhaul The state ofVermont's House and Senate, this month, unanimously passedlegislation revamping the domicile's captive laws and legislationthat will lower the taxes that captives have to pay.

Vermont's governor, Republican James Douglas, signed thelegislation into law on June 4.

This marks the first time since 1981 that the regulatorystatutes were completely revised and updated, said Leonard D.Crouse, who was promoted to deputy director of the captivedivision. The statutes, now, “are easier to read,” he said, notingthat many piecemeal changes had been made over the years.

Such changes have included the addition of provisions relatingto branch captives and reciprocals and employee benefits, heexplained. “It was all over the place. Now we have tried to make itmore readable and easier to look up and understand,” he said,explaining the gist of H. 452.

The second bill passed into law, H.466, capped premium taxes forcaptives at $200,000. Several large corporations were paying thestate $300,000, he said. Eleven companies paid more than $200,000,he said.

“We've done this because these are the people who have beensupporting our industry here for a long time,” Mr. Crouse said.“The large ones cause very few problems for us.”

Mr. Crouse continued that the hard market “opened everyone'seyes, because companies are putting more premiums in theirprograms. And more [captives] were reaching the higher tier.”

He said the domicile became concerned that organizations payingmore than $300,000 in premium tax might consider redomicilingsomewhere else.

“In Vermont there are other things more important than premiumtax, such as jobs,” he said. “The residual value of having thesecompanies here is unbelievable. We now have 460 active captives. Wedid 70 last year and we're right on track for this year.”

Molly P. Lambert, president of the Vermont Captive InsuranceAssociation in Burlington, Vt., said the new legislation is“remarkable news, particularly given the fiscal pictures in moststates.” She said response has been very favorable from captiveowners who are just getting the word the captive legislation haspassed.

“Obviously they are very pleased and they see it as a strongsignal from the state of Vermont that we want them here,” she said.“Through the whole four month process, through the House andSenate, there was not one 'nay' vote on this legislation. It'samazing. I've never seen anything like it.”

Highlights of H.452 include:

A reduction of the mandatory minimum capital and surplusrequired for sponsored captives, from $1 million to $500,000. Italso establishes a minimum capital and surplus of $1 million forall risk retention groups.

Before the ruling, “RRGs were just blended into the whole massof captive insureds and were subject to whatever requirementscaptive[s] were subjected to,” Ms. Lambert said.

A provision that permits alien captives to merge with Vermontinsurers.

Previously, Ms. Lambert said, anyone with a Vermont captive whowanted to move an offshore captive to Vermont could not merge thetwo unless the offshore was redomiciled to Vermont. It also worksthe other way around, allowing freer access between offshore andonshore domiciles.

A provision that allows non-profit groups to form captives inVermont.

Under the current law, non-profits “find a circuitous way toform a captive,” she explained. “They have to establish afor-profit captive mechanism and then explain to the IRS that theyare a non- profit, but are required to have a for-profitcaptive.”

As well as a cap of $200,000 on premiums collected, the secondpiece of the legislation, H.466, includes an increase in theminimum tax paid by captives from $5,000 to $7,500.

Ms. Lambert said the association deferred to the department,which noted that the minimum amount of $5,000 captives now pay hadnot changed in the 20 years captives have been forming in Vermont.“Our managers tested the waters and they didn't find muchresistance,” she said.

The new legislation, which will go into effect Jan. 1, 2004,will decrease direct premium taxes for captives of all sizes.

“We have four 'bands,'” Ms. Lambert explained. “If you have$0-$20 million [in direct premiums] running through your captive,right now, your direct premium tax rate is 0.4 [percent] and itwill become 0.38″ percent (or 38 hundredths of one percent), shesaid. Captives with direct premiums in the $20 million-$40 millionband, she continued, now pay taxes at a rate of 0.3 percent on thenext $20 million dollars. That rate will become 0.285 percent underthe new law.

Going on to describe changes in the last two bands, she said thetax on the next $20 million (for those in the $40 million-$60million band), now 0.2 percent, will become 0.19 percent. Thefourth band, for captives with more than $60 million of directpremium, now 0.075 on the next $20 million, will become 0.072, shesaid.

For assumed reinsurance premiums, the tax rate in the first bandwill go from .225 to .214 percent, with decreases in the next fourbands also, she said.

Reproduced from National Underwriter Edition, June 16, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.