New captives were more likely to form in the United States than in Bermuda or elsewhere in 2005, according to a new report which also noted that the US has now surpassed Bermuda as the largest captive domicile in the world in 2005 with 1,098 licensed captives compared to 987 here.

The report on Captive Insurance Company Trends and Developments by Advisen Ltd. cites state legislation creating incentives as the main reason why captives, which were historically domiciled in offshore locations, are now choosing to settle onshore.

Advisen Ltd., which provides insight into underwriting, marketing and purchasing commercial insurance, however reports that growth in new captive insurance companies, excluding risk retention groups and health care captives, nearly stalled in 2005 with the top ten domiciles reporting less than four percent total growth in the year from 4,004 to 4,157. It cites falling commercial insurance rate levels and expanding insurance capacity as the primary reasons.

Risk retention groups are bucking the trend due to the US medical malpractice crises as are health care captives which are largely unaffected by the P&C market cycle, the report said.

?Captives typically are formed in response to rising insurance costs or loss of commercial insurance capacity. With commercial P&C insurance premiums falling in most lines, and with abundant capacity for most coverages, there were few incentives to launch new captive insurance companies in 2005,? the report said.

?Of the well-established offshore domiciles, only the Cayman Islands saw meaningful growth last year,? the report said, attributing Cayman?s growth to its focus on health care captives.

During 2005, the Cayman Islands Monetary Authority licensed 59 new captives, while 19 were cancelled. Bermuda saw the number of its licensed captives fall from 1,000 to 987. Other major captive domiciles also recorded declines with the number of licensed captives in Dublin falling from 214 to 206, Isle of Man falling from175 to 165, and Luxembourg falling from 219 to 208, according to a Business Insurance poll.

Within the US, Vermont is still the largest domicile, but Advisen notes it no longer dominates the domestic captive market to the extent it once did. The combined captive domicile count of all other US domiciles ? 556 at the end of 2005 ? exceeds Vermont?s 542. Advisen points to South Carolina as the most successful new domicile. It attracted 21 new captives and RRGs in 2005 and now stands behind Hawaii and Vermont as the third largest domicile with 122 licensed companies.

Despite a lack of captive formation Advisen said captive-related regulatory activity is continuing at a ?steady pace?.

Nineteen US states have now passed legislation intended to attract captives and risk retention groups while other states have attempted to regulate or limit the use of federally authorised risk retention groups, Advisen said. It noted that the Government Accountability Office recently recommended that the National Association of Insurance Commissioners establish a common set of regulatory standards for risk retention groups to be implemented in all states.

In Europe, all 25 member states have until 2007 to adopt the European Union?s reinsurance directive, which includes the regulation of reinsurance captives and mandates that a reinsurance captive will have to maintain a minimum guaranty fund of 3 million euros ($3.6 million). Ireland, which hosts a number of European captives, will likely adopt the directive first, Advisen said.

While new captive formations rose some fifty percent between 2002-2003 due to a hard market, a turn in the market in 2004 and steadily falling rate levels in most lines throughout 2005, caused the number of new captive formations to fall off sharply.

Since the soft market continued unabated in 2005 despite record hurricane losses, Advisen said it seems likely that 2006 new captive formations will hold steady at 2005 levels, or fall slightly. The report notes however that regions or industries, such as those most impacted by the 2005 hurricanes, may stimulate captive growth.