Bermuda has advanced farther down the road towards meeting imminent new European Union insurance regulation standards than most EU member states themselves.

That is the view of Shelby Weldon, director of licensing and authorisation at the Island's insurance regulator, the Bermuda Monetary Authority.

While sitting on a panel at the Bermuda Captive Conference, moderator Scott Gemmell, senior vice-president of Marsh Captive Solutions Group, asked Mr. Weldon how far on, compared to EU member states, Bermuda was in terms of meeting new Solvency II standards.

"From what I have seen on my travels, I would say Bermuda is at the head of that pack," Mr. Weldon told an insurance industry audience at the Fairmont Southampton hotel.

"Quite obviously, Bermuda and Switzerland, are well in advance of those seeking third country (outside the EU) equivalence. We recognised early the critical nature of Solvency II to our market."

The BMA is on target for its aim of matching Solvency II standards before the new rules are introduced in late 2012, according to Mr. Weldon.

Much of the panel discussion, which also involved Jonathan Groves, senior vice-president of Marsh UK Ltd. and Vlad Uhmylenko, a director at Standard & Poor's, focused on the likely impact of the new regulations on the Bermuda captive market.

Captives are insurers wholly or partially owned by the parent companies whose risks they insure. As such, the level of risk inherent in their business is lower than that of large commercial re/insurers who underwrite third-party risks.

Through its classification system - from Class 1 for smaller captives insuring only parent company risks to Class 4 for large commercial re/insurers - the BMA exercises lighter supervision of captives because of the lower level of risk and complexity of their business.

Mr. Weldon said the BMA wanted to keep it that way. "We believe we have got it right as a captive domicile over the past 40 years, but as the world changes we must change with it," he said.

Just how Solvency II will impact captives doing business with EU entities is not yet clear.

Mr. Groves said Solvency II's three pillars focused on capital requirements, corporate governance and transparency. Captives might not need to upgrade in these areas as much as commercial third-party re/insurers, on the basis of the Solvency II "proportionality" scale, he added. This takes into account the nature, complexity and scale of risks being insured.

According to the Solvency II directive's definition of a captive, Mr. Groves added, "80 percent of the European Union's captives would not be classed as a captive". Those writing third-party business, or certain kinds of risks, such as compulsory liability, would not benefit from lighter regulation, he said.

Mr. Groves said EU-based captives would require three to four times more minimum capital, would sustain higher operational costs and need to make greater disclosures to the public.

Mr. Uhmylenko said S&P believed Solvency II would have a major impact on "fronting companies" and could change the requirements for captives "overnight".

Under Solvency II, captives will need to have an actuarial department, as well as functions for internal audit, compliance and risk management, he said.

Most captives would have to upgrade their management standards, due to the "fit and proper" requirement for board members, he added. To qualify directors would need to have understanding and experience of the principles of insurance and how an insurance company runs, he said. While some of the extra management requirements could be outsourced, he said it would lead to extra costs.

Captives would also have to demonstrate their understanding of their own understanding of how much capital they required, outside of the regulatory framework.