Two weeks ago, I referred to the Insurance Admissions Committee in my column about the Cuba threat to Bermuda and someone asked me what the Insurance Admissions Committee was.

I suddenly realised that many people do not know what the Insurance Admissions Committee is or for that matter anything about the Insurance regulatory system in Bermuda.

Below is a brief synopsis of the Insurance Regulatory System in Bermuda.

Bermuda has a very unique regulatory environment because it is a partnership between the public and private sectors.

This regulatory environment was born out of necessity because Bermuda as a result of its size, realised it did not have the resources to create a large insurance regulatory environment.

The early pioneers of the industry also realised that even if Bermuda did have the resources, they did not want to constrain the industry by creating a bureaucracy.

In the early 1970s after many captive companies had established on the Island, it was actually the business sector that called for some sort of formal regulatory process.

This sector quickly recognised that Bermuda had a good thing going and they did not want it ruined.

They wanted a formalised process to prevent Bermuda from losing its growing status as a premier insurance centre.

The person that had the foresight to realise that Bermuda could become a major player in the international insurance arena if it did not become bogged down with bureaucracy was the late Shelton Burgess, who was Bermuda's youngest Registrar of Companies.

Burgess had a vision that Bermuda would become the insurance centre to the world and as a result worked to create a system which worked well for both the private and public sector.

In 1978, after several years of debating how to regulate the environment, the Insurance Act was finalised.

The Insurance Act of 1978 was revolutionary because it removed the solvency burden of proof from the public sector to the private sector by requiring auditors to determine and oversee the health of insurance companies.

The reason this was done was because the private sector already had the expertise and government did not want to build a bureaucracy.

Therefore, the private sector is required to appoint a principle representative who is responsible for determining the solvency of a company based on its financial statement, certain ratios, an auditors report and an actuarial report.

The representative must then report the information to the Registrar of Companies.

This system puts the burden of regulation on the private sector, which supposedly has the professional capabilities to be able to assess the financial credibility of a company, by requiring auditors, accountants and insurance professionals to work together to provide credible information to the regulatory authorities.

What is revolutionary about this process is that it puts a private entity's credibility at risk should a company fail because the professional/private sector is held to a higher standard than the public/government sector owing to the professional code of conduct and ethics it must uphold.

Until the Enron debacle, auditors were looked upon as credible raters of a company's solvency.

Now big auditors like Anderson are being srutinised for their part in Enron's fraudulent financial statements.

I believe the Enron debacle will actually work to make the industry more transparent and prove that Bermuda's regulatory process is a good one because auditors will be even more cautious about the way financial statements are prepared in the future.

Another interesting aspect which emerged from the Insurance Act of 1978 was the introduction of the Insurance Advisory Committee which consists of professionals from all sides of the insurance industry including representatives from both local and international companies who meet once a month to discuss what is happening in the industry and what regulations are being considered.

The Registrar of Companies or someone from his office is present in this meeting to ensure open dialogue exists between the public and private sector.

This committee serves in an advisory capacity to the Registrar of Companies to assist his department to understand what challenges face the industry.

A subcommittee which was formed as an offshoot of the Insurance Advisory Committee is the Insurance Admissions Committee.

This very important Committee vets all applications for insurance companies wishing to incorporate in Bermuda. Bermuda looks at this Committee as the most effective means of policing new companies.

Who could better judge a new company wishing to incorporate in Bermuda than its peers?

The prospective company's peers would know who the players are and whether they have sound reputations or not. The Insurance Act of 1978 was originally drafted to administer the captive movement that was prevalent in Bermuda.

However, in the 1980s, Bermuda saw a new type of company establish on the island with the formation of ACE then XL which really did not fit into the classifications established at the time for the Insurance Act of 1978.

Following the success of these companies, we saw the influx of further financial insurers including Centre Re then the property catastrophe companies in 1993.

The industry once again called for the tightening of regulations on the Island which saw the amendment of the Insurance Act in 1995 to incorporate license requirements for four different classes of business to better represent the types of companies in Bermuda.

Class I is for pure captives (insure only the risks of their parent) and Class II is for captives who write up to 20 percent of non-related business.

Class III is for companies writing more than 20 percent of non-related business and Class IV is for highly capitalised companies that write excess liability and property business.

A majority of the companies on the island still fall into the Class I and II categories but the larger insurers with the greatest market dominance are in the Class III and IV categories.

The system has worked well and has managed to keep out many bad apples.

No system is perfect but the system has definitely served us well because it forces the government and the private sectors to work together to operate effectively and efficiently.

Those who serve on the committees do have a vested interest because they do not want to see their home base ruined by opportunists with no long term commitment to the Island.

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and a former executive of Zurich Global Energy who has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday.

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