BERMUDA

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In the wake of the financial crisis, the captive industry isrunning into new stumbling blocks that can triple the time it takesto set up a captive, according to a captive manager here.

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Gary Osborne, president of USA Risk Group in Montpelier, Vt.,said an agency captive that previously might have been formed intwo months' time now is “rarely done in less than six.”

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The time delays are “morepronounced with group programs, association programs, or any kindof agency programs,” he told NU during the Bermuda CaptiveConference recently. A “single parent–if it's a big, beautifulsingle parent–we can still get those done. They used to be 30 days;even those are [now] 45 to 60 days,” he said.

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“But group captives, agency captives–anything with anycomplexity–[take] three times longer than [before].”

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While some of the hold-ups are due to captive regulatorsrequiring more information, Mr. Osborne said, “It's the banks. It'sthe insurance companies. It's the reinsurers. All of thoseprocesses are adding time.”

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A potential captive owner may be set up with a letter of creditfrom a certain bank, for example, but the insurer may say, “Wecan't take [that bank]. We have no problem with the bank, but we'vereached our capacity with that bank,” according to Mr. Osborne.

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“So this is a whole new thing we've never seen before. Carriersare saying they put a capacity limit on banks.”

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Another result of the financial crisis is that some domicileshave seen their captive regulatory departments cut. “In manydepartments, [captives] is not necessarily their only job, [and]quite a few of the captive divisions have been watered down andhave other responsibilities,” Mr. Osborne said.

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Because some captive departments have been gutted, the processof choosing a domicile has changed as well.

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Captive managers once eager to work with new domiciles are noweyeing the established, more stabile domiciles with renewedinterest.

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Vermont and Hawaii–two of the largest and oldest U.S.domiciles–have become even more popular.

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“Now it's not so much speed to market as knowing that you havethe expertise and regulatory authority and stability that shouldensure the process will go as expected,” Mr. Osborne said.

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He added that his firm is up-front with those forming captives,telling them about the lengthy process. This has not kept peoplefrom forming captives, however. “If they've made the commitment, alot of them are willing to stick with the process,” he said.

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Mr. Osborne emphasized that the current situation is not thefault of any one aspect of a captive formation but rather “acombination of the whole world's situation, where three or fourdifferent processes have been slowed down.”

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He said he doesn't see the situation letting up, however, untilthe economy turns around or until financial regulation reform comesthrough and truly operates to deal with systemic failure.

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The fear for carriers, he said, is that if a large bank goesunder, that carrier could be left with a large exposure.

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“I don't see it changing until we've got more clarity with thefinancial situation. The banks, the carriers, people are a littleskittish,” he said.

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