Nimble Regulation

How is Vermont fostering innovation in insurance?

Vermont has been an innovator in financial services for a long time. We passed our first captive insurance law in 1981. Captive insurance at that time had deep roots in some non-U.S. domiciles—the Cayman Islands and Bermuda—but it was pretty new to the United States. We were able to foster innovation in captive insurance and become the leader in the United States because of a few things unique to Vermont. One is our accessibility of government: whether that’s our commissioner, our governor, our legislature, Vermont is very accessible, and it works very well together. Vermont has always been able to be nimble and take advantages of opportunities quickly and strike while the iron is hot. It has allowed us to stay on top of trends.

The other key is that we have a really good relationship with our industry. We view them as trusted partners in the regulatory process. We know them from long-standing relationships, and we trust them. They know that we’re looking out for the Vermont consumer, and we know that they’re looking out for their customer. That’s where we usually start from when we have these conversations, which is a position of trust. That helps us move forward and have faith in trying things where other jurisdictions that don’t have that level of trust might be more wary.

Tell us about Vermont’s regulatory sandbox.

The regulatory sandbox is something we pushed forward last year in our legislature. We recently completed the rule-making process, and it is open and ready to accept applications. The way we viewed the sandbox and innovation is that we wanted to create a formalized structure to allow companies to come to us.

Not particularly in Vermont, but we generally hear from the industry that the insurance laws are too old; they are not adaptive to the 21st century financial services industry; they’re too restrictive in certain ways; they don’t account for technology or innovation. Creating this formalized sandbox was our way of telling the industry that you have the opportunity to tell us specifically what regulation, what statutory provision, what policy, is preventing you from innovating and offering your product in Vermont, and if you are able to articulate that point to specific provisions, then we’ll entertain an innovation waiver under the sandbox. It’s a really effective way of formalizing what has traditionally been an informal process. It serves a number of purposes. It helps to foster innovation by asking the industry to point out specifically what it is in our laws or statutes that is not allowing them to try a new product or try a new business model. At the end of the day, it provides a more level playing field because, instead of having these one-off conversations, we’re now having a transparent process that all companies can monitor.

How does the sandbox work?

Really, what we are providing is an innovation waiver. A company will apply to the department and say they have a new product—let’s say it’s an on-demand insurance product that you will be able to insure your mountain bike and you can put the insurance on and take it off before and after you have completed a ride.

They might apply and say we can’t meet your 30-day cancellation notification because people are not buying this product for a year or six months; they’re buying it for a few hours at a time. They might ask to get a waiver of that 30-day notice period because it doesn’t fit their business model. That would be a very specific example.

We have to determine that our laws are truly prohibiting the innovation; we have to determine that waiving it would be in the public good. If we do decide that, then they are allowed a two-year period to offer that product in Vermont for up to 10,000 policyholders. It allows us to waive a statutory, regulatory or policy position for a limited time period and for a limited number of policyholders so the company can introduce a new product into our state, test it out, and see how it performs.

Besides the sandbox, tells us about your other initiatives.

We have two specific things that we have done recently to try to take advantage of innovation. One is the memorandum of understanding we have signed with our secretary of state for a blockchain pilot project. There are roughly 20 to 30 new captives that are forming every year in Vermont. We thought this was a natural fit to try a very manageable-scope project where a company can apply for their corporate formation with the secretary of state through a blockchain, distributed ledger technology. It’s a way for our team to get a better understanding of the technology in a very tactical way and determine from that experience whether it can be expanded more broadly to other types of filings, other types of reporting, to examinations, to recordkeeping, whether in our department or the secretary of state’s office.

Another thing we have done is entered into a pilot project using artificial intelligence and smart software. We receive hundreds and hundreds of insurance filings every year, and these filings are often hundreds and hundreds of pages long. We have an examiner and analyst review those filings to make sure they are compliant with Vermont law and to make sure there aren’t things that shouldn’t be in there and to make sure they have all of the various provisions of Vermont law in there as well.

What this pilot project did, simultaneous with an analyst’s review, is use the smart software, artificial intelligence, to take in all of the Vermont statutes and regulations and bulletins and the like and then do an initial review of the policies that come in and provide a deficiency letter for the analyst so that they can see areas where things were included that shouldn’t be and things that were excluded that shouldn’t be. The goal is to leverage technology so that an analyst is not spending time on the easy stuff; that the analyst can be spending their time on the more complicated areas of a filing that require more judgment, more experience, and have bigger policy implications. We have been working with that for 18 months or so. I am hopeful at some point we can have confidence to rely simply on the technology and not have it run in a dual way.

Given Vermont’s position as a leading domicile for captives, are there special considerations when it comes to technology?

Captives are obviously themselves trying to become more efficient in their operations, in their claims management, in their onboarding, in their underwriting, in their investing as well. We have always been very open to insuring new types of risks in the captive insurance company and new approaches and new technology.

One of the more recent innovations is putting cyber insurance in your captive insurance company. That is something that Vermont has been very open to in the appropriate circumstances. There are a number of captives that now write their cyber liability through their captive insurance company. There have been discussions about insurance for crypto currency, whether theft or volatility. We haven’t had any captives that have acted on that or have come to us with an application.

Are there advantages to being a smaller state?

One, it’s the accessibility. It’s those relationships that we are able to develop with the industry. And in all honesty, nothing is really going to go on in our state for too long until we hear about it, such as a consumer complaint. We have a greater confidence that we have a good handle on what’s going on within our state because of its size.

Being a smaller state, you can more quickly adopt legislative changes. Oftentimes we might want to do something, but we need a legislative change to fix something in our statute. We have a legislature that is open to that and willing to listen to our department. We always have a captive bill, and we always have a department bill as well, so we always have an avenue every year to get updates in our statutes and in our framework for financial regulation.