regulation changes that could seriously affect the Island's international insurance business.

Speaking at the National Association of Insurance Commissioners' big June meeting, the Hon. Sir John Swan argued that Bermuda-based insurance companies were rigorously examined already and that harsh action from the US was not needed.

These captive insurance companies were designed to insure the corporations and associations that set them up, he said, and should be viewed and regulated differently than companies that insured "innocent third parties.'' The NAIC has proposed legislation that would impose severe restrictions on "fronting'', the method commonly used to pass insurance business from a US parent company to its captive insurance company in Bermuda.

Typically, the US owner uses a separate US insurance company as a go-between or "front'' when dealing with its Bermuda captive. The captive owner buys insurance from the fronting company, which then passes all or most of the business on to the captive in Bermuda.

This is done because the fronting company holds the insurance licences from the necessary US states. The Bermuda captive, by virtue of its size and location, finds these licences impractical or impossible to obtain.

The NAIC has proposed "model legislation'', which could quickly be adopted by the individual states which are responsible for their own insurance regulation, and would impose tough financial requirements on insurance fronting.

The requirements are highly technical but are generally aimed at ensuring that the insurance companies that act as fronts do not get into trouble if a captive collapses.

Leading Bermuda captive managers have said they do not expect international insurance businesses to pack up and leave the Island if the proposals are adopted. But it would make the whole process of fronting more expensive and complicated.

The NAIC first proposed the changes in 1990, but has faced strong lobbying from many major US insurance organisations as well as from captive centres like Bermuda. The NAIC members are expected to continue discussion on the proposed changes over the next few days.

Leading Bermuda captive managers have said they believe big highly-publicised insurance insolvencies in the US have made regulators nervous about fronting.

But they argue that few Bermuda captives have collapsed, and fronting played little or no part in those disasters.

In his speech yesterday morning, Sir John admitted Bermuda "is not without its problem insurance companies.'' But that is true of any well-established insurance centre, he said.

And the Island "has earned considerable respect around the world for the rigour with which it reviews applications from companies wishing to establish on the Island and for the way in which companies, once established, are regulated.'' He said Bermuda welcomed regulation changes that would "help to protect the integrity and stability of the industry.'' "It is important for us, however, that US regulators and those who adopt new regulations fully understand the true nature of captive insurance risks.

"Bermuda's captive insurance industry represents a cross section of carefully structured, well managed and effectively captive programmes which pose no threat to innocent third parties but which do provide a necessary service to many American corporations -- large and small.''