With a responsive government, a solid infrastructure, a greatlocation and $444 billion total assets–$72 billioncaptive-related–Bermuda's insurance industry, the “gem in Bermuda'scrown,” is still attracting risk managers, said industry expertsand members of Bermuda's government here.

The insurance and captive destination remains popular in spiteof domicile competition and a soft market, they said.

“We're seeking to make sure our regulatory framework stays aheadof the game and to be responsive,” said Deputy Premier and Ministerof Finance for the Government of Bermuda, Paula A. Cox, in SanDiego for the Risk and Insurance Management Society conferencewhere Bermuda is a regular exhibitor. “When there are legitimateissues raised about how we can further enhance, we seek toaccommodate and move fairly quickly.”

At the same time, she told National Underwriter, Bermuda seeksbalance. The aim is to regulate, but “not too quickly, notunthinkingly. We have to always remember the cost-benefit analysisand yet still remember to put pride of place and reputation”first.

This is why, she added, “it's quality, not quantity. We're not abrass plate jurisdiction. We're real people on the ground with realservices.”

She observed that interest in Bermuda at the RIMS conference hasnot waned. In fact, “a number of interested people have come by theBermuda booth and said they are thinking of coming to Bermuda. Sothere's still a Bermuda buzz,” she said.

As a captive domicile, Bermuda is “clearly growing and captivesare continuing to grow,” she said. Bermuda licensed about 76captives in 2007, compared to 82 in 2006. “So the growth is stillthere, still steady, although it may not have been as high as theyear before.”

If anything, she said, Bermuda's captive growth rate is probablyappreciably higher than is reflected by the numbers. She explainedthat rather than counting the segregated cells in a captive, thecaptive is considered to be one company.

Segregated cell and rent-a-captives have opened up the Bermudamarket to smaller entities. She said that although Bermuda wasfirst to introduce segregated cells, through its private act,public legislation was introduced for cells in 2000.

Ms. Cox said that Bermuda's focus, “even in terms of captives,is that we distinguish ourselves in that area. The captives arerather complex structures as opposed to the generic, and we seek tonot be a one-size-fits-all for captives.”

She acknowledged that on top of the soft market, competition forcaptives is much stiffer.

Donald Scott, financial secretary, Government of Bermuda, notedthat although competition for captives is keen and the number offormations in the United States is up, “if you look at the UnitedStates as a single jurisdiction, and look across the board, Bermudais still the leading domicile for formation of captives in theworld.”

He added, “Mind you, we're not blind to the fact that thecompetition is getting stiffer. Regulatory changes in the UnitedStates are making it more facilitative for captives to set up andbe successful.”

One of the challenges in the United States is that because ofits regulatory framework, established individually at state level,there is “no federal umbrella to allow interstate business in thatregard. That's one of the things I think is holding back furtherdevelopment of larger captives in the United States,” he said.

A large corporation trying to do business across continentalNorth America, for example, must comply with “the differentregulations that exist in any number of different states, whichcomplicates the business.”

Mr. Scott also noted that Bermuda's infrastructure has capacityfor any number of formations. “There's no lack of capacity,” hesaid. “We have well-established captive managers in Bermuda, andtheir ability to take on new business seems to be infinite.”

Shanna D. R. Lespere, director of licensing and authorizationsfor insurance, with the Bermuda Monetary Authority, said thatalthough there are a number of jurisdictions, “Bermuda has beenfortunate in that we've had a stellar reputation in the captiveindustry.”

She added that the domicile continues to look for qualitycompanies to form captives.

“Even though the market was soft and incorporations probablyfell down in most of the jurisdictions, we still got more than ourfair share of those captive companies,” Ms. Lespere said.

Although she sees no particular coverage trends, “I've beenimpressed over the last couple of days here at RIMS by the numberof companies coming to us, saying they are looking to incorporatenew captives in Bermuda and actually are quite far along in theplanning process.”

She added, “They know they want a captive, and a lot of themhave actually performed feasibility studies and decided they wantto come to Bermuda.”

Shelby Weldon, director of compliance and insurance with theBermuda Monetary Authority, said most lines of business are stillwritten through the captive vehicle.

“I would add that one of the attractions of Bermuda is the factthat we also have a significant commercial reinsurance market,” hesaid. “So those captives are able to access the reinsurance marketthat complements their captive initiative,” Mr. Weldon added.

While formations in Bermuda are typically from all over theUnited States, “we are even seeing interest from emerging markets,”he said, “including Latin America and Asia. Historically ourbusiness was U.S.-based, but it's spreading globally now with someemerging markets seeing the benefits of having a captive.”

Ms. Lespere added that some of these companies are new to thecaptive game, “so they're insuring those risks they feel they canput in their portfolio from a risk management perspective thatsuits their needs.”

Coverage runs from property to employee benefits to workers'compensation, and “we're still seeing a lot of interest in healthcare,” she said.

Part of the attraction, she added, is the “one-stop shop”available in Bermuda. “We have our captive sector and ourcommercial sector.” From a regulatory point of view, she saidBermuda has been “very careful to insure that we regulate themdifferently, because the risks are different.”

Mr. Weldon said, “Without a doubt, insurance is the biggestindustry in Bermuda.”

Ms. Lespere added that while their numbers are large, “we're inthe quality business, not just the quantity business.” And whilepremium volume is “very significant, it's not just about the numberof captives, it's what premium they're writing, are theyimplementing new programs, how are they utilizing their captivesand the changes in the market.”

She said that “from a risk management perspective, I think mostorganizations find [captives] quite useful as an asset.”

Even though Bermuda could be seen as a paradise among insurancedomiciles, there are a few challenges.

David Kendall, co-chair of the insurance and reinsurancedepartment in the London office of the global law firm of EdwardsAngell Palmer & Dodge, LLP, said in a telephone interview thatthere is a concern that Bermuda be seen as an effectiveregulator.

He explained that among Bermuda's strengths are its regulatoryflexibility and a “lighter touch than seen in the United States orprobably the European Union, which is attractive to people settingup business there, and it's quite a fast track procedure.”

Regulatory authorities in Bermuda, conscious of comparisonsbetween them and other major jurisdictions such as the UnitedStates, Europe and Dubai, are “upping their game,” he said.

Mr. Kendall noted, “I think it's the major commercial insuranceand reinsurance companies in Bermuda that are bringing thatpressure. It's important from their point of view, particularlywhere they are quoted on NASDAQ or in Europe, that they be seen tohave an efficient and effective regulator.”

Overall, he said Bermuda “is doing most [of its business] withlarge insurers, and I think that is how Bermuda would like to beperceived now. Bermuda now is a better reinsurance market thanLondon.”

He noted, however, that the domicile is still attractive tocaptive interests. One of its biggest attractions is itsinfrastructure, which attracts captives and risk managers to theisland because “they have all the experts there,” he said.

Of concern to the entire industry in Bermuda is the availabilityof work permits for expatriates. He explained that the governmenthas said that for those workers not demonstrated to be essential,the maximum period they can work on the island is six years.

“That creates uncertainty,” he said. “You used to be able toextend a work permit, but they have become much stricter. They wantthose jobs to remain local.”

He noted that it's difficult to tell whether new jobs are beingcreated for local people as a consequence of the policy, however.“It may be too early to tell.”

Another issue being faced on the island is the weak dollar. “Ithink it's difficult to attract people from Europe, particularlyLondon,” he said.

U.S. workers, he said, are having a problem withaccommodations.

“Until a couple of years ago, the employer could provideaccommodations without that being subject to U.S. tax,” he said.“The IRS will now tax the U.S. citizen for the benefit of thehousing accommodation, and rental housing in Bermuda is veryexpensive.”

In fact, he said, rent typically charged for a house in Bermudais about $10,000 a month. “So if you have to pay tax on that, itbecomes a factor,” he said.

Mr. Kendall noted that in general, “the insurance sector inBermuda is positive. It's still growing and is still a major centerfor insurance and reinsurance.”

“The old-timers say these things have come up in the past andthey haven't really put people off,” he added.

Mark Spurlock, senior manager in the London office of SMARTBusiness Advisory and Consulting, compared the Bermuda and Londonmarkets.

“London is a great place to get all of your insurance needstaken care of,” he said. “It's a one-stop shop. Pretty muchwhatever is insurable is insurable in London.”

Bermuda, on the other hand, is where “a lot of the reinsuranceworld is based. If you look at the U.S. reinsurance [industry] andwhere that capacity is–property, medical, agricultural–a hugeportion is reinsured through Bermuda.”

He added, “If you're a risk manager, Bermuda is great from acaptive or self- insurance perspective. More and more it's gettingsome direct capacity.”

For those who haven't formed a captive beforehand, or have areasof a risk profile not being put through a captive, “it's relativelyeasy to do that without too much effort on your part,” he said.“There are service providers to help you establish, manage and runa captive, so that's a good route. For the wily risk manager, itcan be a very cost effective way of managing risk.”

Of the average premium, he said, “you're getting to near 50percent when you're talking about the operating costs, the brokermargin, the underwriter expected margins and so on, before you'retalking about what the insureds will ever get back in claims.” Onthe other hand, with captives, “it's about paying out in claims asmuch of it as possible.” With a captive, “operational claimshandling and value-chain costs get taken out of the loop.”

While some types of risks are not totally conducive to captives,a company still wants to be insured or have external capital inplace for events that could take it out of business, he noted.

“Interestingly, this is where a lot of insureds are gettinginsured on both sides,” he said. On one side is self-insurance, forthe more common event that you can predict and assign capitalfor–where Bermuda can come in. On the other side is where insuredsare getting squeezed by the capital markets, the catastrophe bonds,the risk outsourcing to the capital markets, he said.

“Bermuda is actually pretty good at those on the reinsuranceside. The reinsurers will offload a lot of the risk–securitize therisk–and take it to the capital markets.”

When looking to set up a captive, he said risk managerstypically work with their broker to decide on a domicile. “Thebrokers will make a decision based on the price of risk or how wellit fits the coverage that's required,” he said.

“The relationships, the platforms the insurers have in thedifferent geographies are relatively important, but these risks getintermediated by brokers and it is their business to know wherebest to place a risk.”

He noted that the volume of captives globally has stabilized.“Bermuda holds its own,” he said. “I suspect it has half of allcaptives in the world.”

He added, “You tend to get more captives in the hard market.During a soft market when premiums are going down, there is not asmuch incentive in looking at alternative risk.”

In Bermuda, “it's quality, not quantity. We're not a brass platejurisdiction. We're real people on the ground with realservices.”

Paula A. Cox, Deputy Premier and Minister of Finance for theGovernment of Bermuda

“If you look at the United States as a single jurisdiction, andlook across the board, Bermuda is still the leading domicile forformation of captives in the world.”

Donald Scott, Financial Secretary, Government of Bermuda