Principles of Risk Transfer Essay Example | Topics and Well Written Essays - 1500 words

Principles of Risk Transfer - Essay Example In assessing the captive insurance industry in Bermuda, there is a need to understand the nature and merits of considering Bermuda’s domicile. Bermuda’s Captive Domicile Bermuda is a leading offshore captive domicile globally. This is a result of onshore administrative burdens and the costs related to conducting business in a US-based or Lloyd’s-based captive in the mid 20th century. This forced Reiss to look out for authority that would permit the flourishing of the captive insurance. Bermuda was selected due to its unique geographical site, good image and status as a British sovereign boundary that disliked uncertainties and perils normally encountered by multinational corporations conducting their business in politically volatile and irresponsible nations. Besides, captives in Bermuda are majorly owned by huge US firms. It can be noted that the second biggest licensing authority in relation to the number of captives is the Cayman Islands (Duffy, 2004, p. 97). Vermont ranks second in connection to the assets owned by insurance firms and third in relation to licensing of the captives. Regulation of Bermudan is done by the Registrar of Companies and the Minister of Finance under the Insurance Act of 1978, the companies Act of 1981 and the Insurance Amendment Act of 1996 (Sierk, 2008, p. 51). Through the regulation a better flexibility is offered compared to other authorities, with the industry carrying the burden of self-regulation, which accounts for the great success of insurance in the state. Moreover, the insurance industry has frequent annual audits jointly with a certificate of solvency, which ensures transparency in the manner risks are managed. Furthermore, most of the captives are registered in two classes under the Insurance Act. Class 1 insurers are unit parent captives, which are not allowed to write any form of unconnected business, while class 2 are relational captives or multi-parent, which are allowed to write up to 20% unco nnected business (Sierk, 2008, p. 59). Class 1 insurers have a minimum solvency requirement of $ 120,000 during the time of writing while class 2 has a minimum solvency requirement of $ 250,000. However, there are other classes which insurers can register; one of them is class 3, which does not include insurers and reinsurers. This class has a minimum requirement of $ 1 million. Class 4 has a minimum requirement of $ 100 million, which includes insurers and reinsurers writing instant additional liability or asset catastrophe risks. In addition, Bermuda is the best domicile since it has no income, corporate or through withholding taxes for operation of the captive insurance. Besides, the initial cost of putting up an insurance company is approximately $ 10,000. The legislation also provisions for rent-a-captives and secured cell firms (DFA, 2007, p. 13). The insurance industry’s rent-a-captive projects permit unconnected participants to be involved in the process of profits un derwriting from the insured risks in the captive. It also allows them to place irrelevant perils via the captive. Securitization of debt is eventually enabled in the risk securitization. Protected cell firms permit a firm to have distinct departments or cells independent of the other cells in circumstances of liquidation. Apparently, the joint combination of secured cell regulation and the rent-a-captives gives