prevent the National Association of Insurance Commissioners imposing tighter regulations on its members.

A lawsuit is expected to be filed within a week -- just a few days before the NAIC's proposed Model Fronting Act is due to be formally approved.

The action will seek to stop the NAIC's attempts to regulate risk retention groups indirectly, according to attorney Mr. Alan Port, who is active in Vermont's captive insurance industry.

In a recent memo to some of the industry's players, Mr. Port said the suit would "call into question'' the viability of the NAIC's plans to extend its regulatory jurisdiction in the US.

Many captive observers believed the NAIC's measures to more tightly regulate risk retention groups was "the first step towards the over-regulation and ultimate destruction of all alternative risk financing mechanisms'', said Mr.

Port.

It was also viewed as being a move towards multi-state regulation by the NAIC of virtually all alternative risk mechanisms, he added.

Legal action against the NAIC is viewed as a last resort following the failure of intensive political lobbying over a period of many months.

The Vermont Captive Insurance Association may join the National Risk Retention Association as a plaintiff in the proposed lawsuit.

Mr. Leonard Crouse, director of captive insurance at the Vermont Department of Banking, Insurance and Securities, said there was widespread concern about tighter regulations.

"The industry is very adamant in its objections and it is now in the hands of the NAIC to talk or to back down,'' said Mr. Crouse.

" What is next if the NAIC imposed regulations on risk retention groups? Will pure captives be next?,'' he asked.

US on-shore pure captives were saved from increased restrictions this time around but only after vigorous lobbying by the captive community.

Bermuda had a direct interest in measures which would affect Vermont's captive industry, said Mr. Crouse. "The main concern for Bermuda is the fronting issue,'' he added. "About two-thirds of risk retention groups in Vermont reinsure risks to Bermuda.

"Bermuda, therefore, shares the problem. There will be an effect on some companies in Bermuda, without question.''