Update: New Vermont Captives Now Eligible for Incentives

MONTPELIER, Vt., Jun 02, 2009 (A. M. Best via COMTEX) -- Vermont Gov. Jim Douglas signed a bill authorizing tax incentives to entice the formation of new captive insurers in the state.

Captives formed through Dec. 31, 2010, will be eligible for one-time, nonrefundable tax credits of $7,500 to offset premium rates. Also under S. 42, the percentage of premium tax revenue the state may use for promoting and regulating the captive sector will rise from 10% to 11% (BestWire, May 15, 2009).

Douglas said the bill is important to keeping Vermont's status as the largest captive domicile in the United States and the second-largest in the world, in terms of gross written premium.

"As our state tackles budget and revenue challenges, my administration continues to recognize how critical the captive insurance industry is to Vermont and the need to continue investing in our infrastructure and innovating in our regulation," the governor said in a statement.

Vermont offered similar incentives from 2001 to 2003, years of sharp growth in captives. Vermont captive registrations dipped to 16 in 2008, from 32 in 2007 and 37 in 2006 and 2005 (BestWire, Feb. 17, 2009). In 2003, the state saw 77 new registrations, its highest annual total.

State officials have attributed the decline to the recession and to a proposed U.S. Internal Revenue Service rule that would have curtailed the ability of many onshore captive insurers to set aside reserves tax-free. Captive trade groups warned it would have threatened jobs and revenue in the 28 states that have become thriving captive domiciles. The IRS withdrew the rule in February 2008 (BestWire, Feb. 21, 2008).

"Part of Vermont?s success in regulating captive insurers comes down to partnerships involving captive owners, the Vermont Captive Insurance Association, our captive management infrastructure in Vermont and our highly knowledgeable team in state government," Paulette Thabault, commissioner of Vermont's Department of Banking, Insurance, Securities and Health Care Administration, said in a statement.

(Clarifies the implementation date in the second paragraph.)

(By Sean Carr, BestWeek: sean.carr@ambest.com)