Bahamas is shaping a lure for 'captive' insurance companies

The Bahamas is trying to entice foreign companies to set up their own ''captive'' insurance companies here. If they decide to locate in the Bahamas, captive-insurance companies would receive a 15-year tax break under the terms of a proposed insurance statute being considered by the Bahamian House of Assembly. Companies set up captive-insurance firms to cover their own risks and sometimes to do business with the public.

As a tax haven, the Bahamas imposes no income or premium tax on such captive-insurance companies, and none is contemplated. But the government has committed itself to a general nontax policy as part of the new legislation. Under the proposed legislation, captive companies would remain tax-exempt for 15 years from the date of registration.

The proposed External Insurance Act, designed to reestablish the Bahamas as a major offshore insurance center, is the product of two years of close cooperation between government and the private sector.

Industry representatives describe the act as ''regulatory, but not restrictive.'' They say it offers the same incentives as Bermuda and the Cayman Islands - the two principal centers for captive companies - but at a lower cost.

While many variations on the basic theme have developed over the years, captives generally are insurance companies set up primarily to insure the risks of a parent company or group of companies.

They had their start in the Bahamas in the early 1960s, when multinationals in the United States began looking for ways to minimize their insurance costs and provide cover not normally available on the commercial market.

Most relocated their captive-insurance companies to Bermuda when controls intended to clean out the large number of ''suitcase frauds'' made no allowance for their special needs. Subsequent amendment of the 1969 Insurance Act to accommodate captives did little to stimulate the return of captives to the Bahamas.

Spurred by industry recommendations, the Bahamas government agreed to draft additional legislation to allay any concern on the part of London and New York brokers.

The proposed statute incorporates ''in a very pragmatic way the requirements of the industry with the regulatory responsibilities of the supervisory authorities,'' the prime minister says of the act.

Panama, which has also been trying to attract offshore insurers, was badly shaken recently by the disclosure that several companies at the center of major international scandals had used that country as a base for their operations.

The apparent lack of supervision that allowed these unlicensed companies to operate in Panama is something the Bahamas hopes to avoid under regulations that would take effect after passage of the proposed statute.

The legislation applies to companies undertaking a large part of a parent or affiliated company's risks. But it also ensures third-party business can be underwritten to minimize taxes in non-Bahamian jurisdictions.

While allowing external insurers to reinsure their risks, the law requires captives retain sufficient liability to prevent owners from capitalizing on the risk exposure of other companies.

Capital requirements will be based on a 5-to-1 ratio of premiums to equity. Minimum capitalization for a company doing general or property-casualty business is $100,000; and for life, accident, and annuities, $200,000. A company may be required to maintain reserve funds of up to 40 percent of total net premium income to cover claims.

The law also introduces secrecy guarantees similar to those in effect for banks and trust companies.

Recent creation of the Bahamas International Insurance Association indicates the importance the Bahamas places on development of its offshore insurance sector. Members include representatives from the domestic and international insurance industry, bankers, accountants, lawyers, and key public officials involved in monitoring the industry.

Emergence of the Bahamas as a strong contender in the captive-insurance arena comes at a time when Bermuda and the Caymans are starting to face serious problems. A recent study of Bermuda's international companies pointed out that it no longer has the land needed to sustain further growth.