“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 United States 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,” he explained. Sponsors, however, are required to pay “$1 million in capitalization right upfront, and they're fronting [the captives]. Whereas, if you get into a rental capital offshore, what you're doing is renting capital.”

Paul Oblenski, president of AIG Insurance Management Services in New York, said “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,” which will be written on a case-by-case basis, he explained.

“This can provide solutions to these companies to enable them to embark upon a more cost-effective basis to address coverage issues,” he said.

Mr. Crouse also reported that hes seen a trend toward the formation of group captive programs in whats been a record first half for captive formations in Vermont.

Of 28 captives licensed so far this year, five are risk retention group captives and the rest are pure captives, he said.

In all of 2001, Vermont closed the year with 38 new captives–37 pure captives set up by organizations, and one group or sponsored captive–for a total of 527 at year-end, according to the department.

Mr. Crouse attributed the upswing in captive formations to the hardening market, in general, and the plight of the medical business, doctors and hospitals, in particular.

Vermont also has eight applications “in-house that are pending, and we probably have four or five meetings set up in the next two or three weeks,” for new captives, he said.

In addition to National Union Fire, companies forming new captives in the first half of 2002 included Compass Bank, Electronic Data Systems and Premera Blue Cross.

“These are busy, busy times,” Mr. Crouse said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.