Bermuda-based captive insurance companies covering risks in the European Union will not be directly impacted by new EU insurance regulations, delegates at an industry conference heard yesterday.

But when the new rules — known as Solvency II — are introduced in the Europe, extra conditions could be attached by EU member states to business reinsured by non-EU entities.

That was the message from Guy Soussan, a partner with Steptoe and Johnson, who works out of the law firm's Paris and Brussels offices.

Mr. Soussan, speaking on a panel at the Bermuda Captive Conference yesterday on the future direction of regulation, also illustrated the importance for Bermuda of achieving regulation that matches EU standards.

Solvency II is scheduled to be introduced in the EU in 2012 and is designed to improve insurance regulation in the interests of the policyholder, focusing on areas including capital requirement, transparency and corporate governance.

All EU-based insurers and reinsurers would be impacted by Solvency II, Mr. Soussan said, but captives — companies wholly or partially owned by corporations to provide insurance to the parent — would be regulated less rigorously than big commercial insurers, on the "principle of proportionality".

"For Bermuda captives insuring risks in the EU — say you had a factory in France, for example — the captive would not be affected by Solvency II," Mr. Soussan said. "But market access is subject to the EU member states' approval.

"It depends whether the state is lenient or whether it requires you to set up an EU-based captive to insure EU risks.

"Cross-border reinsurance is allowed, but states can apply additional conditions for accepting reinsurance by non-EU reinsurers. It depends on the member state in question, but these conditions might include something like a licensing requirement, or even an obligation to post collateral, as in the case of France."

Much will depend on the recognition of Bermuda as a jurisdiction with regulatory standards deemed to be equivalent to the EU's. Financial regulator the Bermuda Monetary Authority is working hard to achieve equivalence and that is "the right approach", Mr. Soussan said.

Fellow panellist Shelby Weldon, director of insurance licensing and authorisation at the BMA, said that with the increased success of the Bermuda market had come increased international scrutiny.

Regulation in Bermuda would continue to move further towards a "risk-based approach", he added, meaning enhanced supervision of those commercial insurers that take on the biggest risks.

The reclassification of Class 3 insurers, into sub-sections, introduced last year, exemplified this move, he said, as it looked to separate those captives that wrote predominantly related business from those that branched out into writing coverage for third parties.

"I want to emphasise that we intend leave the captive regulatory regime relatively unchanged," Mr. Weldon said.

Mr. Weldon said most of the 900 or so captives on the BMA's register were owned by US entities. The National Association of Insurance Commissioners (NAIC) in the US was considering a proposal to do away with the requirement for US captives to post collateral, he said.

On regulatory equivalence, Mr. Weldon said he believed that Bermuda's captive regulatory regime was already compliant.

Richard Lightowler, a partner at KPMG Bermuda, who heads the accounting firm's insurance practice, said changes in accounting standards would move in step with regulatory changes.

Fair value accounting, the move towards International Financial Reporting Standards (IFSR) and improved corporate governance were key issues on the accounting side, Mr. Lightowler said.

Fair value accounting had been much discussed in the US Congress lately, he added, and had caused accountants to be "somewhat unfairly blamed for exacerbating the situation", with regard to the financial crisis.

The assessment of fair value accounting for insurance contracts, long discussed by the International Accounting Standards Board (IASB), could be a key issue ahead for Bermuda insurers, Mr. Lightowler said.

And with most Bermuda companies reporting by US Generally Accepted Accounting Principles (GAAP), the planned adoption of IFSR, likely to be achieved within the next eight or nine years, was another challenge.

"Those who have good corporate governance will be less impacted by impending regulatory change," Mr. Lightowler added.