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DENVER-Colorado's captive insurance industry has stalled, in spite of recent legislative changes aimed at giving the nation's oldest captive domicile a jump start.

Colorado in 1994 revamped its captive law to permit captive insurers to write employee benefits coverage.

However, that same year the U.S. Labor Department rejected a proposal by transportation giant CSX Corp. to reinsure its group term life insurance business through its Vermont captive. The Labor Department ruling, a nearly insurmountable roadblock for employers that want to use their captives as a benefits funding tool, held that too much CSX-related business would have flowed through the captive.

So far, only one captive has taken advantage of the Colorado law: the Farm Credit System Assn. Captive Insurance Co., which used its unique status as a government entity to form a captive writing medical stop-loss coverage for its members (BI, April 15, 1996).

Colorado had only 18 captive insurance companies at year-end 1996, down from 20 at the end of 1995.

With the recent legislative reforms falling flat, most members of the captive community are hopeful that new faces in the Insurance Division will help the state grow more captives.

This optimistic outlook is perhaps best evidenced by the number of captive managers operating in the state relative to the number of captives managed. Colorado has seven captive managers and 18 captives.

"It's the domicile of choice for captive managers," quipped Paul Burkett, president of Snoaspen Insurance Group Inc., a captive management company he formed in 1995 when he left Meadowbrook Insurance Group of Colorado, another captive manager.

Based in Golden, Colo., Snoaspen manages Westmerica Insurance Co., a pure captive formed in 1994 to write workers compensation, physical damage and garage liability coverage for Phil Long Auto Dealership Group of Colorado Springs.

"The division's attitude is that they want to work with you to solve problems," said Mr. Burkett. "And the infrastructure is here: We've got Milliman & Robertson, Tillinghast, good captive lawyers and TPA networks and managers."

Michael Murphy, principal consultant of Denver-based captive manager RiskCap, agreed: "Nancy Litwinski is very proactive, very solutions-oriented."

Ms. Litwinski took over as assistant commissioner for financial regulation in October 1996. She succeeds Frank Dino, who left in late 1995 to accept a position in the Florida Insurance Department (BI, April 22, 1996).

She came to Colorado after working eight years in the Maine Bureau of Insurance, where she most recently held the post of director of financial analysis. In that position she was responsible for the self-insured workers compensation market as well as the financial oversight and licensing of domestic and foreign insurers operating in the state.

Ms. Litwinski's most significant achievement while in Maine was a 1993 award given to her by the governor for helping address problems employers faced when the insured workers compensation market collapsed there in 1992.

Even though Colorado regulators have done what they could to stimulate growth, a number of outside uncontrollable factors are keeping captives away, some managers suggest.

For example, the CSX decision on employee benefits effectively nullifies the change in the Colorado captive law, Mr. Burkett said.

And Richard Johnson, president and chief executive officer of Alternative Insurance Management Services Inc., was forced to move both Neumann Insurance Co. and M.S.J. Insurance Co. to the Cayman Islands because of the prohibition against captives writing third-party business in Colorado, he said.

After the owners merged, they decided to consolidate their Colorado captives, Mr. Johnson said. Neumann is owned by the Franciscan Health System and M.S.J. is owned by the Sisters of Charity. Both hospital chains are based in Cincinnati.

"They also needed to do third-party medical malpractice because they made a lot of joint ventures with other hospitals, but they didn't want those hospitals to become joint owners of the captive," he explained.

So the captives were merged and moved offshore to the Caymans where they are being managed by Aon Risk Services (Cayman) Ltd. Mr. Johnson continues to do the claims administration work for the captives from his Englewood, Colo., office. This move will likely remove AIMS from its spot as the domicile's largest captive manager. At year-end 1996, it was managing four captives with gross premiums totaling $22.3 million. But next year that figure will be cut in half.

Also leaving the domicile in 1996 was Global Indemnity Assurance Co., a pure captive owned by Browning Ferris Industries. Global redomesticated to Vermont.

The move occurred after Global changed managers, explained Paul A. Froment, vp and branch manager for Johnson & Higgins Services Inc. of Colorado in Denver. J&H lost the business to M&M Insurance Management Services Inc., which moved Global to Vermont, he said. Ironically, J&H earlier this year was acquired by Marsh & McLennan Inc., the parent firm of M&M Insurance Management Services. J&H managed the only new captive formed in Colorado last year, keeping its roster at two.

Lion Insurance Co. was licensed last November as a pure captive by MDC Holdings Inc., the parent of Denver-based homebuilder Richmond Homes. The captive was formed as a result of an insurance settlement from a class-action construction defect lawsuit, Mr. Froment said. MDC Holdings capitalized the captive with $575,000 and paid the remainder of the settlement from its insurer as premiums to the captive, which will then cover any defect claims as they arise.

While Colorado had a net loss of two captives in 1996, things may be different this year, managers say.

RiskCap already has two captive applications pending. One is for a single-parent captive to write the contractual liability risk of a large national association. The other is Healthcare Professional Indemnity Co., which is being formed as a risk retention group to write medical malpractice coverage for rural medical clinics.

Mr. Murphy expects both to be approved in the next few months.

Alan Schmitz, an attorney with Hall & Evans in Denver, is working on a hole-in-one captive for the National Auto Dealers Assn. based in McLean, Va.

The captive, to be called NADA Indemnity Inc. will cover the cost of car giveaways in member-sponsored golf tournaments. Previously, car dealers self-insured this exposure since the odds of making a hole-in-one are roughly one in 43,000, he explained.

Meanwhile, Farm Credit's captive is adding four new lines to its current stable of coverages which include directors and officers liability, fidelity and trustee liability, bankers blanket bond, auto liability, general liability, workers compensation and medical stop-loss.

By the end of 1997, the captive also will be writing auto physical damage, owned property, mortgage impairment insurance and lenders single interest. The last two lines are coverages typically purchased by banks and financial institutions to guarantee the properties they mortgage are insured, explained Don Pasmore, underwriting manager.

Mr. Pasmore's captive is perhaps the Colorado market's greatest success story, returning 76 cents on each dollar of premium paid by its owners since it was formed in 1988.

Unfortunately, not enough other captive owners view Colorado as "home" for their insurance business ventures.

In fact, the Colorado Assn. of Captive Entities decided to cancel its annual conference in Vail because of lack of interest. Instead, CACE is working with the Captive Insurance Company Assn. to co-sponsor an event linked with its spring annual meeting, which is usually held in Southern California