Bermuda holds the top spot as a domicile for captive insurance but the Cayman Islands and Vermont are closing the gap with record captive incorporations over the past year.

This according to preliminary data from AM Best, the rating agency that annually compiles data from recognised captive domiciles.

Experts predict captive growth, which has seen a surge in growth in recent years, is likely to continue with the hardening market and the void in capacity after the September 11 tragedy.

But it is unclear whether Bermuda will continue to attract captives at a rate greater than other domiciles.

Business Insurance this month claimed captive business has been "pouring" in to the Island since September 11 but at least one expert has questioned if Bermuda's market may falter.

Hugh Rosenbaum, captive expert and consultant with Towers-Perrin Tillinghast in London said the answer to whether or not Bermuda will see captive growth in the coming year is two-fold.

Mr. Rosenbaum said : "The hardening insurance market is causing companies to re-evaluate their risk management programmes and consider financing property and casualty risks outside the commercial market".

Mr. Rosenbaum predicted that as of this year - and with many companies already having gone through renewals as of January 1 - "there will be an increase in companies using captives as their first choice in strategic risk financing".

Mr. Rosenbaum said this means there will be captives forming "somewhere". He added that how much of that business will flow to Bermuda can be looked at in two ways.

"There are two broad answers," he said. "With rate increases and a capacity crunch, companies thinking of forming captives will accelerate the process. There will be a lot more captives forming - somewhere."

But Mr. Rosenbaum said of Bermuda: "Captives could be in decline and the reasons are Bermuda's high cost and the perception of regulation restrictions."

Mr. Rosenbaum said the general trend was companies setting up captives offshore and that captives had seen growth even in the soft market of 1999 and 2000.

"In spite of it being the depth of the soft market there were between 200 and 250 captives formed each year. Of those, two-thirds were from US owners and most were formed offshore," he said.

Carol Pierce of AM Best said the company surveys captive domiciles every year. And although the collection period runs through the end of March Ms Pierce said she expect 2001 will prove to have a greater number of captive formations than in 2000.

Ms Pierce cautioned however that an accurate picture of the captive industry must take in to account not only formations but also liquidations.

She added that both Vermont and the Cayman Islands have reported more new formations in the fourth quarter, 2001 than in the previous five years. "These jurisdictions are reporting record numbers," she said.

Meanwhile, those in Bermuda's captive industry reported strong interest late last year and this year. Local captive executives also predicted strong growth for the captive market given market conditions.

Jill Husbands, managing director of business development at Marsh said she has already seen an increase as a result of the hardening market.

In terms of the type of captive formations Ms Husbands said she has seen interest in traditional captives and in rent a captives. But she added that Marsh, which operates in several domiciles, has seen growth throughout the market; not only in Bermuda. Ms Husbands said that included significant growth in the Caymans and Vermont.

Sally Gibson, vice-president of new business and business development at Aon said: "With the hardening of the market, we have had enquiries for new incorporations as companies are finding higher deductibles when renewing their policies," she said.

Ms Gibson said those interested in setting up new captives were showing interest "for the same reasons as those who have set up existing captives."

Speaking to The Royal Gazette, Ms Gibson indicated she had had three new enquiries that very day. "We are finding that because the market is dictating increased retention companies want to get something in place quickly."

Ms Gibson added that enquiries were also coming from industry groups interested in forming captives.

Quest, a captive management company formerly known as Sinser, also reported increased captive business. Nicholas Frost said the number of captives in Bermuda went up by 108 last year and he said that already this year his company has helped set up "a few". He said their is interest in both cell captives and traditional captives.

He challenged Mr. Rosenbaum's comments on Bermuda's perceived negatives as a domicile.

"Clients are not steering away from Bermuda because of costs or restrictions," he said.

The captive area where Mr. Rosenbaum said he did expect to see growth for the Bermuda market is with segregated account captives now that "Bermuda has that legislation squared away".

Several captive jurisdictions already have segregated accounts legislation on their books, but Bermuda could find itself ahead of the pack with tightening of the legislation in the works.

The Segregated Accounts Companies Amendment Act 2002 was tabled in the House of Assembly on December, 14 and is slated for debate in coming weeks.

Law firm Appleby, Spurling & Kempe, who have prepared a "brief" on the amendment, said the tightening of the legislation will make it more attractive to users, and would be a plus for the Island as an offshore jurisdiction.

An article in the May, 2001 issue of Captive Insurance Company Reports cautioned that with the relative newness of segregated cells are not tax tested, especially for American users: "An unfavourable ruling could cloud the use of these vehicles."