The insurance market may be softening in most lines, but you'dhardly know that by the steady stream of captives being formed indomiciles around the United States.

In Vermont–the largest U.S. captive domicile and one of thelargest in the world–for example, captive growth this year isexpected to surpass last year's, despite falling commercial pricesin all but catastrophe lines.

Derick A. White, director of captive insurance with the VermontDepartment of Banking, Insurance and Securities, said that despitethe softening market, the domicile has had an excellent year.

So far, he said, Vermont has formed 27 captives and has eightapplications pending. “I think we'll finish with 40; last year wehad 37,” he said.

Mr. White noted that Vermont is still seeing general liability,workers' compensation and professional liability–especially medicalmalpractice–driving the captive market, but he added that “propertyis close behind that. It's our third most popular line rightnow.”

Meanwhile, the property captives from around the country are notlimited to coastal and earthquake-prone areas, he noted.

He added that Vermont is also seeing more life insurance“Triple-X” programs. These are life insurance companies that haveto post “triple-x reserves (actuarial guideline 830)” he said. “Sothis is our second, and I expect to see four more by year-end.”

Mr. White explained that laws passed in 2000 and 2001 requirelife insurance companies to set up “redundant reserves.” Thereserves will grow over time as the policy ages, which will createa “real hit on surplus for these traditional life insurancecompanies,” he said.

So now the companies are forming captives, ceding the businessto the captive, “and they can take credit for the reinsurance,” heexplained.

He noted that the Triple-X captives could lead to securitizationin captives in Vermont.

“It's being done offshore now, and we might do our first beforeyear end,” he said. “It's allowed in Vermont, but our law doesn'tspecifically state it, so we are going to adjust our statute in2007 to include securitization.”

New legislation, he said, should bring in even more captives,and “these are big-dollar captives–the programs are in the hundredsof millions of dollars.”

Mr. White said that medical malpractice captives are still beingformed, noting that Vermont now has almost 90 captives writingprofessional liability for hospitals and doctors.

“I can tell you that premium for that was almost $1.4 billion in2005, which will increase this year,” he said. “So I've heardrumors that Vermont doesn't do med mal–but it's not the case.”

Mr. White added that Vermont licensed two risk retention groupsthis year, and has a total of 78 active RRGs.

Dennis P. Harwick, president of the Captive Insurance CompaniesAssociation, said the soft market doesn't seem to be an issue withcaptive owners and managers.

“I've been at [captive] conferences, and that has not been anissue of significant discussion.” He said that although the softmarket is a hot topic in the insurance industry press, “it hasn'tbeen a big deal, at least in the captive conference circles.”

Molly Lambert, president of the Vermont Captive InsuranceAssociation, agreed that the softening market seems to be havinglittle effect on captive formations.

She said that at a recent captive insurance seminar inAtlanta–held for captive owners and those interested in forming acaptive–a captive owner stated that, “If I didn't have my captivealready, this is the time I would be forming it. Yourdecision-making [for forming a captive] should be affected by thelong-term risk management strategy for your company. And thevolatility of the market, though it plays in your decision-making,shouldn't be the dominant factor.”

William P. White, who became administrator for the captiveinsurance program at the Delaware Department of Insurance on Aug.1, said that in the past, the primary motivating factor for forminga captive was tightening coverage terms and conditions.

“Captives were looked at as a way to do things in themarketplace that couldn't be done in the traditional market, at thedesired terms and conditions,” he said. But now, he added, captivesare being viewed as a “vehicle for transactions that may be neededto take advantage of any market cycle.”

While coverage is still an issue, he said, “it's now price,coverage and capacity issues. So the need to be in a position totake advantage of opportunities as they come about–to have theright capacity to take care of it–is one of the primary motivatorsnow.”

Mr. White said he expected the captive market to begin heatingup in Delaware in 2007. “I'd like to make sure that Delaware isvery much on the minds of people who are forming captives, to thinkof us along with the other domiciles,” he said.

Delaware has had captive statutes on the books for 20 years, butrevamped its captive law in June of this year.

Rod Morris, captive insurance administrator with the CaptiveInsurance Division of the Arizona Department of Insurance inPhoenix, said interest in captives in his state remains high. Thedomicile, which began accepting captives in 2002, now has 78captives and “may have another half-dozen by the end of the year,”he said.

Mr. Morris said Arizona's focus is in cleaning up its statutelanguage. “There is a proposal for a cleanup,” he said, adding thatthere is also a proposal to allow branch captives, initiated by theArizona Captive Insurance Association, which will try to find asponsor in the legislature.

Mr. Morris said that although most of the captives are fromCalifornia and Arizona companies, other states represented includeFlorida, Illinois, Indiana, New Hampshire, New Jersey, Ohio, RhodeIsland and Texas.

The majority of captives in Arizona are being used mostly forprofessional liability coverage, he noted, although he also seesentities forming for contractors, homebuilders liability andconstruction defect coverage. “We have about a half-dozencontractors and homebuilders,” he noted. “We see quite a few. Thisis a trend–there will be more of these.”

Michael R. Mead, a member of the board of the Arizona CaptiveInsurance Association, observed that he has not seen a slowdown ininquiries or formations of captives despite the softeningcommercial market.

During a soft market, “you can often get a better deal from yourrisk-transfer partners for risk sharing, policy issuance, andexcess and reinsurance, and your better deal carries over,hopefully into the hard market,” said Mr. Mead, who is alsopresident of Crusader Captive Services in Chicago, Potomac CaptiveManagers in Washington, D.C., Meeting Street Management in SouthCarolina, and Sonora Captive Managers in Arizona.

He noted that captives are being formed, not necessarily forlower premiums, “but for cost-efficiency and to control the use ofyour dollars, and you're likely to get more cooperation in a softmarket than a hard market.”