In
this Section:
- BERMUDA
OFFSHORE BUSINESS SECTORS
- BERMUDA INVESTMENT FUND
MANAGEMENT
- BERMUDA STOCK EXCHANGE
- BERMUDA FINANCIAL SERVICES
- BERMUDA COMMERCIAL TRADING
COMPANIES
- BERMUDA SHIP MANAGEMENT
& MARITIME OPERATIONS
See
Offshore Business
Review – Insurance for a more general
treatment of captive insurance companies.
Bermuda
experienced boom conditions in its insurance
sector in 2001 - 2003, with more than a hundred
new insurers setting up shop in 2001, and the
influx continuing in 2002. At least US$13bn
in new capital was said to have been added to
the already substantial Bermudian insurance
sector in 2001/2002, more than replacing the
US$5bn lost in the immediate aftermath of 9/11.
The increase in available insurance capital
was particularly impressive when judged against
bombed-out equity markets at the time had almost
dried up as a source of capital.
All
told, Bermuda now houses in excess of 1,600
insurers, of which the great majority are captives,
and rather putting Dublin in the shade despite
its advantages.
In
2004 Bermuda saw a slight dip in the number
of insurance firms incorporating in the jurisdiction,
with the number of licences issued to insurers
in falling to 77, down from 89 in 2003, and
just one class 4 licence issued (firms with
a minimum $100 million in capital), to CIG Reinsurance
Ltd.
For
class one incorporations, classified as single
parent captives, 28 licences were issued in
2004, compared to 33 in 2003, while class two
licences (multi-owner captives) saw little change
as 12 incorporations took place, compared to
11 in 2003. However, there was an increase in
the number of new class three licences (firms
which do not fall into the above categories),
from 24 in 2003, to 33 in 2004.
Total
asset size at that time exceeded $100bn and
annual premium income exceeded $25bn.
The
predominant portion of premium writings is through
Bermuda’s commercial reinsurance market,
which also writes some direct business on behalf
of large U.S. corporations.
Bermuda is the world's third largest insurance
centre after London and New York.
The
Bermuda reinsurance market emerged relatively
unscathed from the unprecedented hurricane and
typhoon landfalls in 2004, according to leading
independent reinsurance intermediary and risk
advisory business Benfield, which said that
the average return on equity for Bermuda reinsurers
was a respectable 13.3% in 2004, though down
from 19.1% the year before, as the impact of
the storms was softened by a high degree of
retention and disproportionate losses in the
primary insurance market.
Total
losses for the 18 reinsurers reviewed were US$3.5
billion, whilst net income was virtually unchanged,
down only 3% to US$5.7 billion. The average
combined ratio was 96.4%, up from 90.7% in 2003
the report indicated, although only three companies
reported combined ratios in excess of 100% and
only one company reported a net loss.
Balance
sheets increased by 14% to US$45 billion against
a background of slower premium growth rates.
The largest reductions were among the post-9/11
reinsurers, which experienced an average reduction
of year-to-year quarterly growth from 151% to
18%.
However,
Bermuda's
reinsurers were hit hard financially by the
three hurricanes that struck the Gulf of Mexico
and the southern United States in 2005, according
to Benfield.
Following
losses of US$11.3 billion from hurricanes Katrina,
Rita and Wilma, Bermuda's reinsurers registered
a total net loss of US$2.8 billion in 2005 compared
with a profit of US$5.5 billion the previous
year, revealed Benfield's Bermuda Quarterly
report.
In
2005, eleven Bermuda reinsurers reported losses
compared with only one in 2004, while the average
return on equity for Bermuda reinsurers sank
to a negative 6.0% from a positive 13.1% in
2004 and a peak of 19.1% in 2003.
Balance
sheets were also hit hard by the 2005 storm
losses, but the Benfield report stated that
capital replenishment was "swift and outpaced
losses" leaving total capital up 5% to
US$47.2 billion.
After
hurricane Katrina US$18.4 billion of new capital
flowed into Bermuda to replenish battered balance
sheets and exploit the expected price increases
and capacity shortages, with 53% going to the
established companies, 40% to start-ups and
the remainder into side-cars, the report stated.
Since
Hurricane Katrina at least five Bermudian companies
have either ceased underwriting or re-orientated
their business.
"Bermuda's
underwriters were chastened by the 2005 hurricanes,"
observed Chris Klein from Benfield's Industry
Analysis and Research team, adding that: "companies
reacted by reducing their risk exposure, changing
their catastrophe models and increasing their
reinsurance protection."
Casting
an eye to the future outlook of the reinsurance
industry in Bermuda, Mr Klein added that: "Reinsurance
capacity is expected to tighten for the 1 July
renewals as the recalibration of catastrophe
models, a shrinking appetite for peak exposures
and increased cost of capital exert further
sustained upward pressure on pricing."
Bermuda
was the number one domicile for Segregated Account
Companies in 2003, according to a survey conducted
that year by the Bermuda Insurance Management
Association. The results showed that approximately
83 Segregated Account Companies or protected
cell companies (which includes 6,234 cells within
these cells) are domiciled in the jurisdiction,
whilst all other domiciles are host to 126 protected
cell companies combined.
Although Bermuda was a relative newcomer to
this particular sector, industry representatives
said that the jurisdiction had succeeded in
attracting market players largely due to legislation
enacted in November 2000, which created the
right environment for cell companies to thrive.
Bermudan
insurance is regulated by the Minister of Finance
and the Registrar of Companies under the Insurance
Act 1978, the Insurance Amendment Act 1996 and
the Companies Act 1981. The legislation provides
greater flexibility than that of most other
jurisdictions, with the industry shouldering
a considerable amount of self-regulation, and
this partly accounts for Bermuda's success as
an insurance centre. An annual audit is required,
together with a solvency certificate.
Under
the Insurance Act most captives are registered
as a 'Class 1' or a 'Class 2' general business
insurer. Class 1 insurers are single parent
captives which are not permitted to write any
unrelated business, and Class 2 insurers are
multi-parent or association captives which are
permitted to write up to 20% unrelated business.
There
are, however, four classes under which insurers
can register:
Class
1: Single-parent captives which don't write
external business; minimum solvency requirement
$120,000 (at the time of writing);
Class
2: Multi-owner captives underwriting the risks
of their owners, or single-parent or multi-owner
captives writing not more than 20% of external
business; minimum solvency requirement $250,000;
Class
3: Insurers and reinsurers not included in the
other three classes, including reinsurers writing
3rd party business, finite reinsurers, etc;
minimum solvency requirement of $1m;
Class
4: insurers and reinsurers writing direct excess
liability and/or property catastrophe reinsurance
risks; minimum solvency requirement of $100m.
There are additional rules dealing with minimum
levels of statutory and authorised capital,
distinguishing between general and long-term
(life) business.
Insurers
must file annual financial statements and statutory
returns with the Registrar of Companies, audited
by an approved auditor. They are subject to
various other reporting and fiduciary requirements.
There
are no income, corporation or withholding taxes
in Bermuda.
Annual
licence fees in early 2008 vary between USD925
for a class 1 insurer carrying on general business
and USD200,000 for a class 4 insurer carrying
on general business; the initial costs of setting
up an insurance company are likely to be about
USD10,000.
Bermudan
legislation provides for both rent-a-captives
and for protected cell companies.
Rent-a-captive
programmes allow unrelated parties to participate
in the underwriting profits generated by the
risks insured by the captive, and even to place
extraneous risks through the captive. This securitisation
of risk is analogous to the securitisation of
debt. Protected cell companies allow a company
(in this context, a rent-a-captive) to have
separate divisions (cells) which are independent
of one another in liquidation situations. Evidently,
the combination of rent-a-captives with protected
cell legislation offers powerful benefits, and
Bermudan legislation is quite flexible in this
regard.
A
bill passed by Bermuda’s House of Assembly
in December, 2004, aimed to tighten up regulation
of the insurance sector and give the Bermuda
Monetary Authority more powers to independently
regulate the sector. The Insurance Amendment
Act 2004, the result of an IMF assessment, contains
new ‘whistleblower’ provisions setting
out auditors’ obligations and strengthening
protection for those who speak out.
According
to Deputy Premier, Paula Cox, the bill clarifies
the appointment and revocation of auditors and
loss reserve specialists while giving the BMA
formal powers to issue guidance on the required
standards and procedures of those registered
under the Act.
Other
changes in the legislation mean that a principal
representative must write to the BMA if there
is a suspicion that the insurer for which he
acts may become insolvent, and the BMA also
has new powers to appoint an auditor where an
insurer fails to do so.
Also
in December 2004, the House of Assembly approved
a new Segregated Accounts Companies Amendment
Act. Under the Act, Bermuda segregated accounts
companies are available to insurance firms,
collective investment schemes and other special
purpose vehicles that serve an investment purpose.
The purpose of the Bill is to amend section
18 of the principal Act which clarifies the
ownership status of the assets within a segregated
account and rectifies the reference to the Exchange
Control Act 1972, meaning that persons who are
licensed to conduct long term insurance business
will now be able to take advantage of the general
provisions under the Principal Act.
A
segregated account is an account which contains
assets and liabilities that are legally separate
from the assets and liabilities of a company's
ordinary account, which is otherwise known as
its ‘general account.’ Finance Minister
Paula Cox observed that: "The intended
effect of the division between the general account
is to protect the assets of one account from
the liabilities of the other accounts."
The
Bermudan insurance sector has faced a threat
from US legislation, owing to the fact that
in recent years, a number of large US insurance
companies have partly or totally re-located
to Bermuda in order to save corporation tax
on their profits; other, mostly longer-established,
US insurance companies, unable to do this because
it would entail the transfer of their very large
reserve funds out of the US, with consequent
massive taxation, lobbied Congress to legislate
against the 'tax-dodgers'.
In
February 2007, the Bermuda Monetary Authority
revealed that the jurisdiction had recorded
a three-year high for reinsurance company incorporations
during 2006, with an almost 10% increase in
the number of new reinsurance companies incorporated
in the jurisdiction over 2005.
A
total of 82 new reinsurers were established
in Bermuda in 2006. The majority of these new
companies were large, highly capitalised reinsurers.
Captive insurance companies also formed a significant
proportion of the new incorporations.
The
82 new Bermuda incorporations for 2006 compared
very favourably with figures recorded by other
jurisdictions such as Vermont, which had 37,
South Carolina with 29 and the Cayman Islands
with 50.
“We
are very pleased to see this significant increase
in the number of new reinsurance companies in
Bermuda,” announced Jeremy Cox, Supervisor
of Insurance of the Bermuda Monetary Authority
(BMA). “This is a clear indication of
the continued confidence the market has in Bermuda
as a leading global insurance and reinsurance
centre, and the practical, effective regulatory
framework in place here.”
Cox
added that Bermuda recognised the continued
significance of the captive market as core business
for the jurisdiction, and remained focused on
maintaining its leadership position as a captive
domicile: “There is a collective recognition
and commitment to the fact that captives remain
a key element of the mix of high quality reinsurance
business conducted in Bermuda."
“For
example the BMA is very supportive of initiatives
such as the Bermuda Captives Conference, and
being part of Bermuda’s presence at other
international events focused on captive business,”
he stated. “However it is good to see
that overall Bermuda continues to be a very
attractive domicile and good business choice
for large commercial reinsurers and captives,
as well as the primary market.”
