Vermont Legislature SmartTranscripts:

[Maria (Office of Legislative Counsel)]: It

[Sen. Thomas Chittenden (Vice Chair)]: is February 12. We are back, and we are starting on a new bill, H-six 49, an act relating to cap insurance companies, and the Illinois Legislative Council is going to start us off by walking us through the bill.

[Maria (Office of Legislative Counsel)]: Yes. I'm happy to do that. I'm just gonna share my screen here. Just a little background. This is the annual captive insurance bill, like proposals submitted by the Department of Financial Regulation. You will separately have another bill from DFR that deals with the financing insurance and securities. This bill is only captive insurance. There are only three sections. I'm gonna do a high level overview, and then Deputy Commissioner of captive insurance Christine Brown is here and she can explain the policy behind why they're making these proposals. You know, captive insurance is a form of self insurance. There are many different types of captive entities, basically defined by how they're structured or the types of risks that they cover. The two types that are addressed here are risk retention groups and sponsored captive insurance companies. So, we'll start with risk retention groups, because those are the first two sections of the bill. These are entities that are authorized under federal law, the Liability Risk Retention Act, I think. That law basically allows businesses that do similar business, they're in an industry and they have a lot of similarities in terms of the kind of business they do and the types of risk they are exposed to. The federal law allows them to form a group. It's member owned, the members are the businesses, and then they collectively manage their own liability risks, commercial liability. The first section pertains to the legal investments, what they're allowed to invest their money in and not. The proposal is to add a new subsection specifying that no risk retention group shall make a loan to or investment in its members or affiliates of

[Sen. Thomas Chittenden (Vice Chair)]: its

[Maria (Office of Legislative Counsel)]: members, and this prohibition shall not apply to any loan or investment in effect prior to 01/01/2026. So again, the members are the owners who are the businesses. Can I talk to you for a second? Sure. Oh, you're right at the very beginning. Okay. I thought I was lost. Already? I scrolled to the top, and I'm like, okay. Wait. This is exactly what she was trying sorry. Yeah. No. No problem.

[Sen. Thomas Chittenden (Vice Chair)]: Just for my own curiosity, can those businesses be unrelated? Like, they don't have to be under the same ownership structure? Correct, yep. It can be 20 different construction companies Exactly, coming yeah. Okay.

[Ian Davis, President, Vermont Captive Insurance Association (VCIA)]: Yep. Gotcha.

[Maria (Office of Legislative Counsel)]: Section two also pertains to risk retention groups, and specifically their annual reporting requirements or financial statements that they must submit to DFR. If you scroll on page two, just so that you're aware, you'll see that the stricken language pertains, this applies to all captive entities. There's a specific provision here that pertains to risk retention groups, and you'll see a cross reference to another section of law. Those are the annual reporting requirements for insurance companies generally. So, the proposal is to strike that and you'll see later on new provisions specific to risk retention groups. Removing them from the general reporting requirements, we'll talk about, we'll just go through what the new requirements. And then you'll see at the very bottom of that page beginning on line 20, this session basically cross references a law that requires that these reports generally be kept confidential, but makes an exception for risk protection groups because under federal law they're not allowed to be kept confidential. That is maintained, just in a different section of law. So it's stricken here for the faith. So the new language subsection E basically just says, on the board March 1 year, in a form of manner prescribed by the Commissioner, each risk retention group shall file with NAIC, which oversees groups nationally, a copy of its annual statement convention blank, the template that insurance companies use to file the financial statements, the signed Jurata page, I don't know if I'm pronouncing that right, the actuarial certification. What is that? It's a form of notarized document. Okay. Signed by officers basically attesting to the accuracy and truth of the data. Okay. I think that's right. Okay. Any other additional filings prescribed by the commissioner for the preceding year? And then also filing subsequent, any subsequent amendments or addendums. And then sub section F, so those are the annual reporting requirements. Subsection F basically requires quarterly reports also be filed. And it specifies the dates by which those reports need to be filed. Deputy commissioner Brown will speak more about all of this, what's happening now and why these proposals are here. And as I mentioned, subsection g specifies, oh no, this is just a rule making for the commissioner. Any additional requirements are necessary. And then subsection J, again, confidentiality applies to all of these reports except for the risk retention group reports. Section three pertains to sponsored captive insurance companies. These are basically entities that provide captive insurance benefits to lots of different businesses. They handle all of the administration compliance with state laws. They can be separate businesses, but they all have their own cell, they're managed separately, their assets and liabilities are kept separate, but they take advantage of the structure and a sponsor to basically take care of all the administrative requirements. The proposal here is to specify that thirty days after a protected cell, which is those are the businesses, that's what it's called, they're separate accounts, shall file with the commissioner's statement under over affirmation certifying that the protected cell possess the requisite funding prior to commencing business, including any required collateral in accordance with the protected cell's proved plan of operation. Commissioner approves those business plans. And then just a requirement that that statement is signed by the executive officers of the cell. Sometimes with the exception of unincorporated protected cells, then the sponsored captive entity signs on their behalf because they're not officially a legal entity. So they basically have an account. And that's it. So this takes effect in July. Well, that's your questions for me, and Deputy Commissioner Brown will explain more about Why? Why.

[Sen. Thomas Chittenden (Vice Chair)]: Answer the question.

[Maria (Office of Legislative Counsel)]: Let us do you want me to stop sharing so that it's not on your screen, or is it not coming up?

[Sen. Thomas Chittenden (Vice Chair)]: I think we have it on our left.

[Maria (Office of Legislative Counsel)]: Okay.

[Sen. Thomas Chittenden (Vice Chair)]: Perfect. I think we have Christine Brown next to speak to the bill. That's Stephanie and Christine.

[Maria (Office of Legislative Counsel)]: Thank you.

[Sen. Thomas Chittenden (Vice Chair)]: I I must say when I heard out of insurance, I was expecting, like, a tone of the it has, like, bigger

[Maria (Office of Legislative Counsel)]: Oh, no. That's the other deal. Your cheapest weight. It's coming. Honest company. Hi, everybody. Thank you for having me set a record. I'm Christine Brown, and I am the deputy commissioner for the captive insurance Division in the Department of Mutual Regulations. So, thank you for having me to explain a little bit of the why about these changes. Maria did an excellent job explaining the changes, but I do have some background I can share.

[Christine Brown, Deputy Commissioner of Captive Insurance, Vermont Department of Financial Regulation]: I don't know if you want me to answer specific questions or just go through, each section and then give a little background. Would be the most helpful. Excellent. Okay. Thank you. So, the first change again is around risk retention groups not being allowed to make loans or investments in their members. So, the reason why we did this, and this is not a change in our regulatory practice, we have not allowed these loans in risk retention groups for as long as I can remember. We may have one from a very long time ago that has an investment in one of their members and that's why we included that language at the end to say it shall not apply to any loan or investment in effect prior to the effect January 1. I think we have one out there, but for as long as I can remember, we haven't allowed this. And the reason why is because we really want to make sure that the premium dollars and the capital that is in the risk retention group is preserved to pay the claims for the members organizations. And like you would ask the question if they're related or under the same umbrella and they aren't. So, these entities are pooling risks, paying in premium, and then those premium dollars really need to be held and set aside in a reserve to make sure that they don't pay claims, and we don't want those funds to be lent out to members. In a different type of captive, a single parent structure where it's the, you know, the captive owner is just one entity that owns the captive, we do sometimes allow loans back to the parent if there's excess funds and they have to. But in this case, it doesn't make any sense and like I said, in practice we don't do it. So, this is just codifying that because we started getting more frequent questions requests to do it, and we kept having to say no, and we said, we've got to, it's easier just to put it in statute and make sure that everybody sees it. This, if I may, I would imagine that if there's one member of the risk retention group or a couple members that are sort of financially shaky, that increases everybody's risk in the group in some way, potentially. And so, that's maybe why some of them are asking for money, it doesn't seem Prudent. Prudent, given that you're trying to protect everybody. That's right. Yeah. There's always credit risk associated with the organizations and so we keep an eye on making sure they're paying their premium timely and we don't want to then lend that money back. It doesn't always mean that somebody who's requesting money is on a financially shaky ground. Sometimes they are looking to make investments or do other things, but it's just in practice it doesn't. And then, you know, you also get into potential conflicts or equity type issues if we're allowing it for one entity and not another member. So, it's just best practice not to allow loans. So, have any other questions about that? Great, thank you. So, the next section as explained, changed or I guess it didn't change, again, this isn't changing any of the requirements that we've had in practice what we've done. So, we've always required risk retention groups to file annual and quarterly financial statements with us. What happened most recently was we underwent an accreditation process with the National Association of Insurance Commissioners, and I'm happy to report that we got excellent marks. But one of their minor comments was that we're requiring this documentation, but we don't have the quarterly, the requirement for quarterly financials in our statute. So, we only referenced annual statements. And this was true on our traditional insurance side as well. So, you'll see these similar amendments in that bill when that comes across your desk. So, really what we're doing here is just making sure that we're not only talking about the annual statement and statute, but we're also referencing quarterly statements. And instead of referencing the traditional law, which we did, that's the language that you see struck, referencing subsection 3561A, we decided to just put it all in our captive section so that we're not referencing back to traditional law and we have everything right in our statutes for captives. So, this isn't changing anything. These rules were in place before with respect to the annual statement being due on March 1 and being in the form of the, what we call the annual statement that is a form prescribed by the National Association of Insurance Commissioners. That's all the same. And we have always required quarterly filings as well, but just putting it in statutes to make it more clear. So that was an easy fix for us because it was something that we're already doing. And then, as Maria mentioned, the confidentiality section that was struck is just added down to the bottom here to kind of align with where we're talking about risk retention groups specifically. Those reports are filed with the NAIC, so they're public documents, so they're not held confidential or other types of captives. And then finally, the last section is relating to that protected cell structure and we find that we've seen a lot of growth in this type of captive. There's some efficiencies with getting into one of these cells. So, the structure's already formed, the administration's being taken care of by a sponsor entity, but you can own what you own what they call cell. I think we've probably talked about this before, but it's similar to a condo or an apartment building where somebody owns it and then different entities rent out what we call cells as their own risk bearing entity. And because we've seen a lot of growth and because they're very similar to just a small mini captive insurance company, We wanted to align what we require of captive insurance companies generally in section 6,004. We require them to attest to the fact that they've put in the capital and the funding that we've approved upon licensure, and we're just mirroring that same requirement here for cell captives. So, it's strengthening our regulation to make sure that when one of these cells forms, they put the money in before they start writing business. That's really what we're doing here is protecting, you know, the cell owners and potential claimants. We haven't had any issues. We haven't found that people aren't funding, but we think it was prudent to kind of match up what we do with other types of captives here for cells.

[Sen. Randy Brock (Member)]: Just a question. Yes. And that is aside from requiring audits and so on, independent audits, what forms of accountability exist to give you comfort that what's claimed is in fact true.

[Christine Brown, Deputy Commissioner of Captive Insurance, Vermont Department of Financial Regulation]: Sure. So we have the audit requirement. We also have an actuarial requirement. So every year that all captives have to get an actuarial report and opinion that says that the reserves that they're booking are adequate and then that amount is audited as well. And then every five years we go in ourselves and do an examination. So, it's a statutory examination. We look at financial risks and also compliance risks to ensure that they're following the captives are following their business plan and that the financial statements are reported accurately. And then we use these filings that are referenced here. Every captive has to file an annual report which is separate from the audit. It's kind of our first look at the results. It comes in before the audit's due and those are used to conduct financial analysis and we do that every year to make sure that there's- that's really a higher level look. So, we're looking at trends, ratio, financial ratios, just to make sure that everybody's looking okay. If are any trends that are negative, we immediately will contact that captive insurer and work on a plan to get them back in the sense.

[Sen. Randy Brock (Member)]: And you're using your own staff examiners to do those individual reviews on-site at the insurance place of the district

[Ian Davis, President, Vermont Captive Insurance Association (VCIA)]: or not?

[Christine Brown, Deputy Commissioner of Captive Insurance, Vermont Department of Financial Regulation]: So we use our own staff. We have staff of 32, but we don't usually go on-site to these businesses. They're located all over the country. And the world now too. We have 10% that are global. So we do a lot of the work remotely after COVID. We've been a lot of the systems are now electronic, we're able to do a lot of our testing remotely, but there's also captive managers here in Vermont and primarily around the Burlington area and we visit their offices. They're the ones that do the accounting and the day to day operations for the captive insurers. So, we'll visit them and we conduct interviews remotely through Teams meetings with board members for captive insurance companies when we do our on-site or our statutory exams.

[Sen. Randy Brock (Member)]: Have you found any violations of substance in any of the reviews that you've done?

[Christine Brown, Deputy Commissioner of Captive Insurance, Vermont Department of Financial Regulation]: Throughout the years we do have findings. If they're substantial, they're included in the examination report. And then we work with companies, it's called a company action plan. And basically, we have to put them on a plan to get them to kind of comply with whatever violation it was. A lot of times, they're more around solvency and less around compliance, statutory compliance. And we just work with companies to make sure that they're maybe increasing a premium or it's usually with group captives like risk retention groups, where we see this more often. Pure captives, because it's their own risk, it's their own company, they tend to fund and put money in whenever they need to. But it's these group captives that have smaller members where we have to really pay very close attention to make sure they're solvent.

[Sen. Randy Brock (Member)]: Have you had any situations in which there have been violations of such magnitude that you've had to take either regulatory action or you have to terminate the relationship or anything else?

[Christine Brown, Deputy Commissioner of Captive Insurance, Vermont Department of Financial Regulation]: We do sometimes have to take regulatory action and again, it's usually from a solvency perspective and we hire a special deputy rehabilitator. We have a contract with somebody out of Boston who's in a law firm and they do an excellent job in helping us rehabilitate companies or liquidate in some cases if we have to. It is infrequent, but it does happen and it's good that we have that in statute. We have the ability to take over a company and then make sure that if we're seizing assets, we're making sure that payments are being applied equitably to members of these groups.

[Sen. Randy Brock (Member)]: Have there been any situations in which you had to make public the details of any action that you've taken like this?

[Christine Brown, Deputy Commissioner of Captive Insurance, Vermont Department of Financial Regulation]: Yes. We have them posted on our website. So we, sometimes it takes a long time because the coverage is, you know, long tailed and we're working through settling claims. So, the details are posted on our website. We do have, I think a couple up there right now that are posted publicly. So, anytime there's an action like that, we post it to make it public because, you know, if there's other entities or people who are, you know, have an interest, we wanna make sure that they know what's going on. Thank you. The the risk retention group aspect of captive insurance is is relatively new, right? Or it didn't start though at the beginning, it was just the sort of single captives that were dispensed No, they've been around since First, the 80s there was a liability insurance or a product liability need in the market and people were not, companies weren't able to get that. So, that's the initial reason why they formed, but then very quickly medical malpractice was an issue for a lot of hospital groups. So, the majority of risk retention groups early on were formed to provide medical professional liability for hospitals. In Pennsylvania, that market was really shrinking. So, all of those risk retention groups are still around today. So, they've been very successful. That yeah. The the groups have been around for a long time. Okay. The cells the cells are more new. Okay. Yeah. It's funny when as soon as you said cells, I remember this very very specific testimony. The first year I was in this committee about the cells and how they worked, and I have this visualization in my head about that. Anyway, I think the condo, it brings it, I think, it's easier to understand when you think of it that way. Like an owner and then renting out the license basically is what the cells do.

[Sen. Thomas Chittenden (Vice Chair)]: Alright, ready for the next witness? Ian Davis, president of the Vermont Capital Insurance Association.

[Ian Davis, President, Vermont Captive Insurance Association (VCIA)]: Afternoon, everyone. Ian Davis, President of the Vermont Capital Insurance Association. Just want to start by again thanking you for your time. Obviously heard from Maria and Christine now on the substance of the bill, so I thought I would devote just a few minutes to talk about how it is that the bill is developed and the process that we follow as an association, which you're working in tandem with the department to put forward really a consensus bill each and every year. It's critically important to Vermont. Many of you who've been on this committee now for several years, you know this and have heard this, but it really from even a reputational standpoint, it's really important that Vermont is seen as always looking to innovate and making sure that we are not resting on our morals from a statutory standpoint and looking to evolve with the needs of the marketplace. I talked about the process. It begins early and often in the fall timeframe where we solicit input from our four thirty plus member organizations. We invite them provide input and suggestions as to what they would like to see, whether it's new or innovative risks or issues that they're running up against and adhering to the statutes that exist. We then kind of vet those through our advocacy committee, which is kind of our legislative and regulatory committee, again, comprised of a diverse kind of cross section of our membership, but many of them are captive insurance attorneys that live and work here in the greater Burlington area. Ultimately, we began having introductory conversations with Ruth Hardy to introduce what proposals the membership would like to see presented. It usually involves many back and forth conversations. I think we both share a goal of bringing forward a consensus bill. Again, we really want to be seen as good partners in all of this, and we recognize the importance of kind of shepherding this industry in a responsible manner. Clearly that is reflected in this year's bill. I mean, it's not particularly substantive, but these are meaningful updates. I mentioned, wanting to give you a perspective from the broader captive industry and how they view this annual exercise that we do. We've often talked about it as an annual tradition. Would say in many ways today, it is an expectation of the industry that Vermont will have a bill that will pass, that it will be seen as a, again, a thoughtful kind of modernization of their captive statute. So it is really, from a reputational standpoint, critically important that we continue to do this. I would note, however, that, and this came up in house commerce where we introduced the bill initially, is, you know, talking about how important this exercise is. I think we had a legislator challenge us and say, you should come back next year with a more meatier bill, because I think, and truly, it's important that we continue to look to, don't want to say be certainly not on the bleeding edge, but be leading edge when it comes to innovating within this industry and even things that are within our own control, cleaning up the statute and whether that's eventually a comprehensive rewrite or things that we can be doing to make it easier for companies to do business here in Vermont. I'm new to the association as of six months, but I've worked in this industry for going on ten years now. Under my leadership, that's certainly something that I intend to look to do, is to actively and more proactively be engaging our membership in meaningful ways so that we can really ensure that we're not just resting on, as I said, our laurels and what's made us successful for the last forty years, but what's going to propel us into the next forty years, and how can we shepherd this industry forward in such a way that is consistent with Vermont values, consistent with what has made us successful for the last thirty or forty years. So more to come. But again, we really couldn't do any of this without all of you. Every time I'm here in the seat, I want to thank you all for your service to Vermont, for your service to our industry. It really does have a material benefit on Vermont's economy, on people who live and work here every day. And we just really appreciate your being such willing partners with us and shepherding this administration.

[Maria (Office of Legislative Counsel)]: They don't have a meaty bill unless you mute it.

[Ian Davis, President, Vermont Captive Insurance Association (VCIA)]: Well, we would do it, yeah, I think in a thoughtful way, but yes. Like I said, more to come.

[Sen. Thomas Chittenden (Vice Chair)]: Thank you very much. That's all we have on the agenda.

[Maria (Office of Legislative Counsel)]: Stay

[Sen. Thomas Chittenden (Vice Chair)]: here till the chair comes back before we adjourn, or no? No.