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BURLINGTON, Vt. -- With Vermont legislators expected to craft a rent-a-captive law next year, the captive domicile appears set to jump into the expanding rent-a-captive niche.

Speaking as part of a panel on rent-a-captives at the Vermont Captive Insurance Assn.'s annual conference this month in Burlington, Vt., rent-a-captive manager Phillip J. Stevens emphasized the growing interest in rent-a-captives.

They are "clearly a middle-market strategy," said Mr. Stevens, vp of Aon Re Worldwide in Greenwich, Conn. He markets and manages Aon's Bermuda-domiciled Gateway Insurance Co. Ltd. rent-a-captive facility.

But in that middle-market niche, "There is. . .quite a bit of market demand," Mr. Stevens said. "From my perspective you have to have one if you're going to compete in this niche of business, the middle market."

Typical rent-a-captive clients are in the $750,000 to $2 million annual premium range, he said. An organization that pays more than $2 million in premium is usually large enough to form a single-parent captive.

But another panelist, John P. Yonkunas, a principal with Tillinghast-Towers Perrin in Weatogue, Conn., suggested that larger policyholders could be interested in rent-a-captive vehicles, as well.

"We've heard a lot of talk over the years about employee benefits, and we've used rent-a-captive facilities to provide quasi-employee benefits to corporates," Mr. Yonkunas commented, explaining that he's seen some programs placing some post-retirement benefits in rent-a-captive structures.

"We've also seen rent-a-captives used to take advantage of underutilized assets on the balance sheet," Mr. Yonkunas said, adding that he's also seen them used to fund unusual risks.

Larger corporate clients with sophisticated risk management programs also can find ways to take advantage of rent-a-captives, he said.

Thomas W. Kozal, a senior vp at Altrisc Services Inc. in Stamford, Conn., noted that there are four distinct types of rent-a-captives in the market:

* Corporate rent-a-captives, in which an individual policyholder or group elects to take risk.

* MGA rent-a-captives, in which a managing general agent takes a risk on the book it handles and "the insureds are not cognizant that there is an alternative risk vehicle behind their program."

* Agency rent-a-captives, in which a retail agent takes on the risk.

* Custom rent-a-captives, which are used to provide some sort of unique business benefit.

In the typical corporate rent-a-captive program, the policyholder funds its expected losses in cash, Mr. Kozal said.

"Right now the market for this type of business. . .is about as dead as a doorknob," he said. That lack of activity is largely the result of a soft traditional market and the development of other types of rent-a-captives, Mr. Kozal said.

While corporate rent-a-captive activity might be slow, there is considerable activity these days in the MGA or agency rent-a-captive categories, Mr. Kozal said. In these structures, the policyholder gets coverage through an agent, who subsequently places it into a rent-a-captive program.

Custom programs, meanwhile, include rent-a-captive vehicles dedicated to a specific purpose, perhaps to facilitate risk swaps or securitizations for the policyholder. There is considerable activity in the custom program area as well, Mr. Kozal said.

Among the reasons policyholders might consider rent-a-captives include that they can: be an alternative to a high self-insured retention program or a retrospectively rated plan; be a pre-loss funding technique; test whether a captive makes sense; create a profit center; or facilitate reinsurance and program business opportunities, Mr. Stevens said.

Potential benefits to policyholders, he said, include: the opportunity to reap underwriting profits and investment income; the greater emphasis on risk management that can result from a captive approach; the possibility of a profit-sharing mechanism with agents and managing general agents; and the fact that a captive approach can address unique insurance issues.

From the rent-a-captive owners' perspective, benefits of offering rent-a-captives include: the ability to provide clients a value-added service; a tool for generating new business and retaining existing business; a mechanism for facilitating the ceding or assumption of reinsurance; and an opportunity for additional revenue, said Mr. Stevens.

"And I know it's a dirty subject," he said, "but at least to the owner, there is a revenue stream in terms of captive management fees."

In a session earlier in the conference, Leonard D. Crouse, Vermont's director of captive insurance, said the state is "definitely looking into some kind of rent-a-captive bill this coming legislative session."

"I think it's time that we look at rent-a-captives," Mr. Crouse said. "I think they're going to stick around. If the market stays the way it is, they will."