A proposed new exempted insurance company that is on the verge of being capitalised could be in direct competition with domestic insurers that provide cover for local hotels.

Local insurers were mixed in their reaction to the proposal -- which could see an exempted insurer gain permission to do domestic insurance business for the first time ever.

"If they are going to be doing a lot of business in Bermuda, there's obviously going to be a reaction to the question of whether they should be exempted,'' said Mr. John Sainsbury, managing diector of Argus Insurance Company.

"Other (local) companies will say we don't have any freedom from taxation until 2016,'' he said. "If they are going to do considerable business in Bermuda, and end up insuring a lot of hotels in Bermuda, they could be a fairly large insurance company by Bermuda standards. "And there might be some comment then as to whether they have impaired their tax exempted status, quite validly. "It is fine for insureds to look for the Holy Grail in terms of cover, but at the end of the day experience is experience, rating is rating and expenses are expenses. There is no magic to it. And no one is giving anything away here.'' The company, provisionally named CHA Insurance Company Ltd., is sponsored by the Caribbean Hotel Association, Centre Re and Aon Corporation. Dean Witter Reynolds Inc. has raised 75 percent of the required capital through a private placement and is confident the rest will follow. The company is being capitalised to the tune of $25.1 million.

The company would propose to enter into a quota share reinsurance treaty for non-catastrophe perils with London market insurers, ceding almost, if not all, of the risks to the reinsurer. More retention of the risks could occur in the future.

Under a separate reinsurance arrangement, Centre Re in conjunction with Centre Cat, has proposed a reinsurance structure which would meet the company's goals.

Said Mr. Sainsbury: "A company with $25 million in capital can't retain the catastrophe element, so it is still going into the market. And then the reinsurer is going to want to make a profit, no matter who it is.'' Vice president of Aon Capital Management (ACM), Ms Carla Ranum, said a critical component for the company was to be able to get a spread of risk throughout the Caribbean and Bermuda.

The more locations for which risks are written, the lower the risk exposure to the company.

"It's valuable to us to insure properties in Bermuda,'' she said.

The company is to be a Class 3 licencee under the proposed new insurance regulations, tabled in Parliament on Monday and due to be debated today.

In order for the company to insure Bermuda hotels, it will have to obtain special permission from the Government, a grant that they would obtain after incorporation.

Finance Minister the Hon. David Saul conceded that he was not aware of any other insurers who had been granted the waiver.

The proposed waiver is something that some backers of the scheme may be unwilling to discuss, for fear that publicity about it would create a backlash in the hotel market, and decrease the chance it would be granted.

But Ms Ranum said: "I don't think that we are going to significantly disturb the domestic market.

"By being based in Bermuda, we will employ people in Bermuda. There should be a net benefit for the rest of Bermuda because we will be bringing in work from the rest of the Caribbean. We will be bringing in dollars.

"We're going to have most of our operations from Bermuda. Underwriting, accounting and all of the administration would be handled out of there.'' Dr.

Saul said that he knew nothing about the proposed new company at this stage, and that it was academic at the moment, because no such application was before him.

"I have not seen an application for an incorporation of such a company and I have not yet seen any application for licence under the Companies Act,'' he said. "Nothing can be taken for granted.'' But according to a private placement memorandum, published January, "Aon (Corporation) has received a letter from the Bermuda Registrar indicating that an exemption will likely be granted.'' Ms Ranum said: "To the extent that the domestic market is disturbed and becomes a heated issue, it may make our position in Bermuda precarious. Quite frankly, we are domiciling the company in Bermuda, because we understood that we would be able to write in Bermuda.

"We were offered the same thing in Cayman, but decided that there were many reasons for domiciling in Bermuda and chose that market. If a big issue is made of this and for some reason our ability to write in Bermuda is threatened, we're going to re-think this and re-think it very quickly, because it is an extremely important issue for us.'' Mr. Kirk Kitson, president of Kitson & Company Ltd. said insurance rates for Caribbean hotels can sometimes be three times as high as in Bermuda.

"Capacity to place cover is limited down there, which is not true here,'' he said. "The insureds in the Caribbean are often not able to place 100 percent of the risk because they can't find the aggregate insurance. But that is not true of the Bermuda market.

"We are able to provide insurance capacity for our risks between the resident companies and the non-resident companies. And to a great degree we don't have a rating problem as well.

"Our policies are not as restrictive, either, largely because to some degree the Bermuda market is rated on the basis of its own experience. It can't be entirely rated on the basis of its own experience because Bermuda is in the hurricane tail and it is possible that one of these mega storms could hit Bermuda.

"But the fact of the matter is that it has never done so. The Caribbean has a completely different loss experience than Bermuda.'' Mr. Kitson didn't see too much of action in Bermuda and felt local hotels "probably would not throw a 30 year insurance relationship out of the window to save $10.''