An insurance company wishing to be licensed must show that those persons who control its affairs are competent, with evidence of ability, integrity and experience. The insurance regulations in force in most jurisdictions are flexible and have been designed to accommodate a wide variety of insurance business. Certain companies with particular characteristics may be allowed to operate under modified regulatory requirements after the nature of the risk and, in particular, the risk that insureds, wherever they reside, may have if their legitimate claims are not met in full, has been assessed.

Fundamental to an application for an insurers licence is the submission of a Business Plan which will (1) be a major factor in determining whether or not a licence is issued and (2) if so, define and thereby control the modus operandi of the licensee. The Business Plan must include, where appropriate:

1. Usually a five year projection including anticipated risk exposure and asset base at the end of each year during the period.

2. The type and source of business contemplated, specifically categorised.

3. Anticipated premium income, properly categorised.

4. The reasons for choosing the jurisdiction as a base for operations.

5. An overall assessment of the risk factors and, if appropriate, an analysis of proposed reinsurances. Companies may need to furnish details of reinsurance and net risk retained as determined in consultation with the Commissioner of Insurance. The prime concern is to ensure that where reinsurances are not used to reduce substantially the potential liabilities outstanding, the policies should be taken out with only reputable well-reserved companies.

6. An assessment of the expected ratio of claims to premiums for each category of business written with a statement explaining the rationale applied.

The various licence fees are approximately $2,500 (initial) and up to $10,000 (annual) depending upon the jurisdiction and the type of licence required. The name of the insurance company should reflect the type of insurance being written.

Capital requirements for insureds will vary, but those companies engaged in reinsurance, life or general (domestic or international) business should expect to have a minimum paid-up capital of $100,000. Capital levels will be determined on the following criteria (projected or actual):

1. The size of the company as measured by its assets, capital and/or surplus, reserves, premium writings and insurance in force.

2. The kinds of business written, the company’s net exposure and the degree of diversification of lines of insurance.

3. The past and anticipated trend in the size of the company’s capital and consideration of premium growth, operating history, loss and expense ratios.

Solvency ratios will be established on the basis of the risk assessment in each particular case. As a guideline, the minimum net worth requirement could be calculated as follows:

1. General onlyup to $5,000,00020% of premiums

over $5,000,000 10% of premiums plus $100,000

2. Long term only$180,000

3. Long term and generalup to $5,000,00020% of premiums

over $5,000,000 10% of premiums plus $180,000

Net worth can be defined as the excess of assets (including any contingent or reserve fund) over liabilities other than liabilities to partners or shareholders. The assets readily available must be sufficient to meet liabilities at all times, and therefore the net worth must comprise assets which are acceptable to the Commissioner. The range of permitted assets will be as broad as possible but will depend upon the type of business to be written. Companies must satisfy the Commissioner that the maturity dates of relevant assets are planned to correspond with maturing liabilities.

Permitted assets can include:

1. Cash and time deposits with acceptable financial institutions.

2. Fixed interest securities and blue-chip equities traded on recognised stock exchanges.

3. Eurobonds rated at BBB or above by Standard & Poor.

4. Premiums receivable.

5. Irrevocable Letters of Credit issued by acceptable financial institutions.

All assets should be valued at market value and no amounts receivable from related parties should be included without approval from the Commissioner.

Prohibited assets will usually include:

1. Yachts, aeroplanes, motor vehicles and livestock.

2. Loans to group or connected companies and individuals.

3. Investments in options, futures or forward contracts.

Branches/subsidiaries of leading international insurance companies will receive every assistance when applying for a licence; parent companies, however, may be requested to provide a suitable guarantee covering the liabilities of any subsidiary applying for a licence. Approval from the insurance commissioner in the company’s country of domicile and copies, periodically, of statutory filings made in the home jurisdiction, may be requested.

Captive insurance companies - formed normally by professional partnerships or industrial or commercial companies in taxable jurisdictions wishing to self-insure their risks, possibly to reduce premium costs or cover exposures that the normal international insurance market will not accept - will receive lenient regulatory treatment because of the limited public exposure. In all cases, however, the applicant will need to display a high degree of professional competence.

Profit and loss statements and balance sheets must be prepared and audited. Such accounts may be required every six months, at the discretion of the Commissioner, and subject to the type of business written. In any event, a full set of accounts will be required annually.

In addition to being suitably professionally qualified, auditors must satisfy the Commissioner that they have adequate knowledge of the insurance industry to be relied upon to conduct a proper audit. The auditor is usually required to give the necessary annual confirmations (accounts/business plan compliance) to the Commissioner. Residence in the jurisdiction may or may not be a prerequisite to obtaining approved-auditor status. The appointment of a qualified actuary and the submission of valuations will be also normally required and, again, this will be subject to the type of business written

In summary, the Commissioner will need to be satisfied that an insurance company’s administration, management, control and accounting systems are satisfactory for the type and scale of business being undertaken.