Formations have been pretty steady, he noted, with 75 in 2005 and 77 in 2004. "So something in the 70s is a healthy number," according to Mr. Willitts.

He listed two factors that have served to dampen the captive market overall. Besides the softening market, he cited "the noise the [IRS] has been making" about withdrawing a key deduction for reserves--a controversial proposal the agency dropped last month. Given these two disincentives, "the pure, single-parent, smallish captive is a little more hesitant to form these days," he said.

It's understandable how falling prices in the standard commercial insurance market would make people think twice about going into a captive, he noted.

"If it's marginal and you think [the insurance market] is going to be cheaper next year, you probably don't want to go into a captive. If you add to that the focus the IRS has been putting on captives, there has been a slight hesitancy," he said.

Even though the IRS proposal would potentially have done more damage to onshore U.S. captives, it still slowed down captive formations in general, he added.

Still, Mr. Willitts said the current softening market has been described as "competitive, not stupid." He added, "It's going that way, but it hasn't made it yet." Despite the market's direction, however, "we still have people forming captives for good insurance reasons," he noted.

Indeed, he said a positive result of the softening market for captives is that fronting has been made more available. "I think that if you look at cells, you'll find that as the market has softened, fronting companies are prepared to look at business they previously were less enthusiastic about," he said.

He also said more group business is "creeping into cells," which he expects will be a continuing trend this year.

Mr. Willitts added that the Bermuda Insurance Managers Association and the Bermuda Monetary Authority are doing a survey on cell captives in Bermuda, which is expected to be completed in time for the Bermuda captive conference in June.