BURLINGTON, Vt.—As captive use expands and evolves to address new or nontraditional exposures, captives are likely to draw regulatory attention from beyond those who typically have overseen captive business, one captive regulator suggests.

Speaking on a panel discussing trends and challenges in the captive industry and Vermont at the annual conference of the Vermont Captive Insurance Association this month in Burlington, Vt., David F. Provost, deputy commissioner of the Captive Insurance Division of the Vermont Department of Financial Regulation, said that as captive use increases in such areas as health care and banking, captives are “getting into areas where other regulators are going to have interest.”

“There are a lot of folks out there with an interest in financial regulation, and captives are a part of that,” the Vermont captive regulator said.

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On another regulatory front, Mr. Provost said he's concerned about the potential regulatory impact of more and more states passing captive laws. He worries about the possibility of some states lowering standards for captive regulations, he said, adding that “some states don't even require exams anymore.”

While Vermont can adjust the scope of captive examinations to make them more appropriate to the level of risk and less burdensome on captive parents, Mr. Provost said he thinks captives should always face some sort of examination.

“The exam needs to be commensurate to the risk,” Mr. Provost said, citing the risk-focused examinations applied to risk retention groups. “The risk-focused exam can be a long-run timesaver,” Mr. Provost said. “And we will work on applying that ideal to the rest of our captives.”

Mr. Provost said he's also concerned that the number of states entering the captive business could dilute the pool of available captive regulatory talent. “We can't spread that around too much,” he said.

Among other captive trends, Daniel D. Towle, director of financial services for the Vermont Department of Economic Development, cited ongoing uncertainty about the application of the Nonadmitted and Reinsurance Reform Act to captives.

“There's been a lot of misperception,” Mr. Towle said, noting that among the inaccuracies are suggestions the act is prompting widespread captive redomestications. “We've heard some that I think are trying to benefit from this rumor that captives are leaving (Vermont) in droves,” Mr. Towle said. “That's not true.”

Another panel at the VCIA conference focused on the NRRA and its effect on captives. At issue is whether the NRRA applies to captives and, as such, allows states to apply self-procurement taxes to captive parents based in those states with captives domiciled elsewhere.

While the act was intended to simplify surplus lines insurance tax allocations—in some cases deliberately fomented to prompt existing captives to redomicile, some speakers suggested—confusion remains because of the act's failure to specifically exclude captive insurance.

The NRRA panel's moderator, Patti Pallito, deputy managing director of Aon Insurance Managers (USA) Inc. in Burlington, said, “From a Vermont perspective, we're very concerned about what NRRA can mean to captives in this state.”

“States are in great need of money, and this is a way they think they can pick up money quickly, so you've got to be vigilant,” said Thomas M. Jones, a partner at the McDermott Will & Emery L.L.P. law firm in Chicago.

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Panelist James T. McIntyre, a partner in the McIntyre & Lemon P.L.L.C. law firm in Washington, said the NRRA didn't give states any new authority and didn't change self-procurement tax laws.

“NRRA didn't change the tax laws with respect to the self-procurement tax,” Mr. McIntyre said. “If you were required to pay those taxes prior to the passage of NRRA, you're required to pay them today.”

Ms. Pallito said captive parents should understand how states intend to apply self-procurement tax rules in determining their response. “We've had some companies that actually moved their captives from Vermont,” she said. “Or they established fronting captives in their home state if there's captive legislation there.”

The latter approach could allow those companies to benefit by reinsuring risks placed in the fronting captive to the existing captive elsewhere, she said, because “NRRA doesn't apply to reinsurance.”

Thus far, however, “Most companies we've seen have really taken a wait-and-see approach because there really is a lot of confusion,” Ms. Pallito said.

VCIA President Richard Smith said he's concerned about the effect that confusion might have on captives and the Vermont domicile. “From my perspective, the longer there's ambiguity about what NRRA does or doesn't do, it's not good,” he said.