The first sponsored captive in Vermont, the largest U.S. domicile, was formed nine months ago by John Hancock, said Leonard Crouse, director of captive insurance for the Vermont Department of Banking, Insurance and Securities.

"It's not that common, but it's going to be," he said. "It's giving an opportunity for some of their clients to participate in a captive program."

Organizations that may be too small to establish a captive will be able to operate as a cell in a sponsored captive, he said.

Mr. Crouse explained that only an established captive in Vermont, an insurance company or a reinsurance company licensed in the U.S. can form a sponsored captive.

"Why we did that was so their capital would be in play here," he said. "It's like a rent-a-captive, but we have some big money behind our captives."

Rent-a-captives and sponsored captives are sometimes lumped together because "they both have cells." Sponsors, however, are required to pay "$1 million in capitalization right up front and they're fronting [the captives]. Whereas, if you get into a rental captive offshore, what you're doing is renting capital."

Paul Oblenski, president, AIG Insurance Management Services in New York, said that, "It's quite clear that what you're seeing today by insurance purchasers is a combination of factors, which are increased costs, increased retentions to insureds, and reduced coverages."

He added that, "All three of these factors contribute to increased liability and retention by the client, and balance sheet exposures."

The captive will cover specific lines of business for AIG clients looking for "a proper cost effective and disciplined funding mechanism for their retentions."

He noted that, "This can provide solutions to these companies to enable them to embark upon a more cost effective basis to address some of these issues."