Regulation of captive insurance companies is falling behind increasing product and service innovation, says a delegate at the International Captives Congress (ICAP) which was held in Bermuda in June.

The August Captive Insurance Company Report (CICR) includes several reports from ICAP and in a session moderated by Malcolm Butterfield, principal of KPMG and former Bermudian Registrar of Companies, the question of whether respect for insurance regulations was growing or diminishing was addressed.

The CICR reports that Graig Watanabe form the Hawaii Department of Insurance told the conference that he has noticed more product service and innovation over the years due to the changing nature of the way risk is financed as well as increasingly sophisticated consumers, but questioned if current regulations were satisfactory to keep up with the changes.

Clayton Ingham from the South Carolina Insurance department said that his state had kept pace with the changes due to their focus on the evolving alternative market.

He said their insurance legislation was flexible, designed to accommodate innovative products, continued deregulation and diversity, and that the state's insurance commissioner and state government were committed to this stance.

However the CICR warned: "Behind the puffery are some real lessons for insurance regulators - and some potential traps as well. Too much flexibility can be as bad as being too old-fashioned."

Jeremy Cox, Registrar of Companies in Bermuda said the Island's unique position of a strong, established, and substantial reinsurance market gave it a regulatory edge in the market.

He said that "One-stop shopping" appealed to many captive owners, and Bermuda's closer proximity to the United States sets it apart from other foreign countries.

CICR commented: "Although valid, just what that has to do with regulations for captives remains obscure to us."

Mr. Cox was contacted by The Royal Gazette on Friday and said that the way that Mr. Butterfield conducted the session was to ask the delegates different questions on similar topics.

He said that CICR may have confused things and without the list of questions that had been asked, the CICR comment was not worth responding to.

Mr. Cox said of the report: "It is only somebody putting together a quick synopsis of what happened at the conference."

Assistant Director of Captive Insurance in Vermont Derrick White said "Laws are similar, regulators are not."

Mr. White said that regulating was an art, and as regulators interpret the laws, the process was ripe for misconceptions.

Mr. Watanabe agreed and said that regulators had much discretion in interpreting laws and said: "Success depends on regulator's upfront due diligence."

And although service providers do much of this in Bermuda, Mr. Cox warned that regulators should not depend too heavily on service providers to do the required due diligence.

Mr. Ingram felt that too much flexibility could be troublesome and flexibility could lead to abuse.

He said that although service providers can offer a great line of defense, and the state will allow captives to self manage in some situations, the state will not abandon its regulatory role.

CICR commented: "This discussion might be interpreted as an off hand criticism of South Carolina, where other regulators seem to be implying that not enough due diligence is carried out."

The conference also touched on the influence of the International Monetary Fund (IMF) and their expected introduction of international standards, and although the panel was asked if they felt regulations would become stricter, CICR reports that the panel instead focused on the need to better explain to outsiders how captives are unique.

The report also says that although the National Association of Insurance Commissioners (NAIC) is trying to unite the fragmented state regulatory system in the US, captives have never been part of this focus.

CICR commented: "Mr. Butterfield tried to provoke the panel through some probing questions designed to see if any of the regulators would "drop their guard" and provide something more substantive - all for nought. The session turned into a series of politically correct responses." And the CICR report added that a summary of collective comments from regulators was: "We're all flexible - [we're all accessible."