1994's banner year for captive formations will be equaled this year.

J&H's senior vice president Mr. Roger Gillett said the 3,100 new incorporations worldwide were not fueled, as in previous years, by a hard US casualty market, but by the corporate drive for bottom line profits. Mr.

Gillett's remarks are contained in an article he authored that was published in the official publication for Risk Insurance Management Society Inc. (RIMS).

"The New Insurance Paradigm'', in the March edition of Risk Management, focuses on the captive industry.

Mr. Gillett writes that the uncharacteristic combination of a soft casualty market and a significant number of captive formations has led to a great deal of conjecture. He said one explanation for this is that new uses for captives "are coming into vogue for many companies''.

But he argues that apart from customer programmes to generate profits, there have been no new programme trends emerging recently.

There have been no new developments in the five main reasons given for captive formation. Those reasons include using reinsurance to reduce cost; improving cash flow; lowering after-tax costs; lowering expenses; and to address coverage or administrative issues.

Captives are being used more to protect companies from market swings, to obtain greater control of their financial future. Another reason for more captives is that corporate culture and risk management philosophy are changing.

Business leaders are sticking to core businesses and shedding unrelated operations, or redefining their firms and making new investments.

There are corporate quality initiatives where individual departments are developing plans in support of the overall corporate strategy. Risk managers are developing long term plans for their company's risk financing programme.

They wish to reduce reliance on the traditional insurance marketplace and are willing to pay their own losses, over time, below a certain level. Because of anticipated high rates with the future return of a hard casualty market, firms want retention levels as high as they can handle. They also want: More multi-year programmes to provide stability for future costs and get better access to the reinsurers, who are the ultimate risk takers; Capacity from a company on a net line basis, enabling the corporation to commit to terms for more than a year; and To contain insurance expenses by removing duplicated or unnecessary functions and by combining classes of cover wherever possible, and transferring only losses of a catastrophic nature.

Mr. Gillett said firms can use captives as a risk retention alternative, and by accumulating surpluses, they can comfortably raise their retention levels over time.

He said there is evidence that corporations are moving toward captives because they see them as agents for achieving greater stability, efficiency and profitability.