BERMUDA: INSURANCE

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

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See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

Reporting in April, 2008, the Bermuda Monetary Authority (BMA) recorded aggregate total assets of USD440.4bn, for the insurance sector, representing a 33% increase over the USD329.9bn achieved the previous year. The market also continued to enjoy strong results in terms of gross premiums written, which amounted to a total of USD115.8bn for the year, surpassing the USD100.7bn written the prior year. Of these amounts, captives accounted for USD72bn in total assets and almost USD22bn in gross premiums written.

A total of 71 new insurance and reinsurance companies were established in the Bermuda market during 2007, compared to 82 in 2006. The fall in registrations reflected the generally softer market conditions globally, which saw a slowing of captive incorporations. The majority of the new Bermuda market entrants for 2007 were once again Class 3 insurers, a combination of captive and commercial companies. With respect to the commercial sector, 2007 saw the formation of two Class 4 companies.

This reflected the general inactivity in the property and casualty market, and the relative lack of major catastrophic events during the year, resulting in the likely record profitability of existing insurers and a sufficiency of global capital in the property/casualty sector.

“We were very pleased to see that the tradition of quality business coming to Bermuda was maintained with the companies that were successfully established here during the year,” observed Jeremy Cox, Deputy Chief Executive Officer of the BMA, who is responsible for all supervisory activities conducted by the Authority.

“The high quality of the sponsors behind the companies, in addition to the continued increases in premium volume written that we have been recording over the years, indicates that market confidence in Bermuda as a leading centre for international insurance and reinsurance remains strong."

Bermuda is a significant player in the global insurance market with over 1,400 registered insurance companies (2007), most of which are captives, made up of 1,135 general, 100 composite, 77 long-term insurers, and 19 domestic insurers. Naturally, the island is concerned at legislation in the US Congress which may constrain the freedom of US insurance companies to use Bermuda as a reinsurance destination.

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.

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.

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.

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.”

In August, 2008, the Bermuda Monetary Authority announced significant enhancements to Bermuda’s solvency and disclosure regulations for insurance.

These changes will help ensure Bermuda achieves recognition as having equivalent regulatory standards to those in Europe’s Solvency II Directive. The Authority also announced new measures to facilitate special purpose vehicles (SPVs) and the publication of financial statements submitted to the Authority under new reporting requirements for high impact insurers, using Generally Accepted Accounting Principles or GAAP.

“I’m pleased to say that the developments announced today mean we’re well on track to achieving our objective of achieving equivalence, or mutual recognition status, in Europe and elsewhere,” said Matthew Elderfield, Chief Executive Officer of the Authority.

“Bermuda is now one of the countries at the front of the pack in terms of preparing for Solvency II.”

With the recent passage of the Insurance Amendment Act 2008, the Authority will now introduce, among other new and expanded regulatory initiatives, the Bermuda Solvency Capital Requirement (BSCR), an enhanced solvency regime that it will apply to Bermuda’s Class 4 (re)insurers.

“The BSCR will assist us to build on Bermuda’s existing solvency regime by establishing risk-based capital adequacy standards for high impact insurers,” said Mr. Elderfield. “This will allow for a more risk sensitive approach to setting solvency requirements for Bermuda’s insurers, in line with international developments regarding capital adequacy such as Solvency II."

“Implementing the BSCR will also help with the Authority’s transition to recognising companies’ internal economic capital models,” he added.

“Permitting the use of internal models for our (re)insurance companies to determine appropriate capital levels for their business, subject to review and approval of each model by the Authority, is again consistent with developments in international insurance regulation," Mr. Elderfield explained.

Other initiatives facilitated by the new provisions in the amended legislation include the publication of financial statements submitted to the Authority by Class 4 companies, under new reporting requirements for these high impact insurers, using Generally Accepted Accounting Principles or GAAP.

“These new provisions enable us to publish GAAP financial statements, which will result in enhanced standards for disclosure for Bermuda’s Class 4 insurers, in line with international standards relating to transparency in the industry,” Mr. Elderfield said.

The legislation also facilitates the re-classification Bermuda’s Class 3 insurance sector, which includes a large number of firms, with a wide range of characteristics, from captives writing a limited amount of third-party business to large purely commercial (re)insurers.

“This means we’re establishing further sub-categories within the Class 3 group, based on their respective risk profiles,” Mr. Elderfield explained. “We will be able to refine our application of risk-based supervision to these firms further, to ensure they receive the level of oversight that is appropriate to the nature of their business.”

He added that the reclassification also introduces a new category of ‘Special Purpose Insurer’, focused on these fully collateralised special purpose vehicles (SPVs) that are established to conduct certain specific insurance transactions (most typically asset-backed securitisation transactions). The new classification will make it less costly for SPVs to be established in Bermuda. “The changes agreed for SPVs will help maintain Bermuda’s position as a leading insurance market,” said Mr. Elderfield.