Alison Dyer-Fagundo and Sherman Taylor, of Estera, discuss the unique appeal of Bermuda as a captive insurance domicile.
This article first appeared in Captive Review.
Bermuda's foundation in insurance, together with its motivation to continuously develop and modernise, continues to contribute to positioning the jurisdiction's insurance market, particularly captive insurance, as uniquely and enduringly relevant; the Bermuda market is set to accomodate the new and innovative captive formations that are developing in response to a technology-driven world.
The root of Bermuda's difference
As a premier captive domicile, Bermuda is one of the oldest and most established. Captive owners now have a wide choice of jurisdictions for domiciling their captives, as many countries and even individual US states seeking new opportunities for their economies have set up their own captive insurance industry.
These newer captive jurisdictions mostly compete for local or regional business, and generally for those captives that only write related business, or where the risks are well known and the loss experience is well established. However, it becomes desirable to use a more established and experienced captive domicile with international standing, when the underwriting risks are uncommon or when the insurance programme is complex and/or innovative due to the nature of the captive owner's business.
Bermuda, when compared to newer captive domiciles, continues to shine as a premier jurisdiction for all captives, and stands out for its unique abilities to accommodate and support complex captives while providing nuanced captive solutions.
Setting Bermuda’s captive market apart from its contemporaries are its strong roots in the insurance/reinsurance market and its deep insurance/reinsurance talent pool. Many of the world’s leading captive managers, insurance brokers, legal advisers, corporate service providers, and other insurance professionals are located in Bermuda. There is a wide and varied choice of insurance service providers, ranging from the large, multinational global organisations to the smaller standalone companies that specialise in delivering bespoke insurance solutions. Bermuda’s regulatory framework supports the complexity of innovative captives and creates a unique profile for Bermuda as a specialist captive domicile. The experience and understanding of the Bermuda Monetary Authority (BMA) as the jurisdictions primary regulator, and the island’s strong legislative framework, work together to create a sound regulatory environment allowing for innovative insurance/reinsurance solutions.
The tech edge
Another strong example of how Bermuda’s insurance market seeks considered innovation is the BMA’s newly introduced regulatory sandbox, which became available to new insurers in 2018. This new option is designed to provide an incubator for newly registered insurance companies with a need to test innovative ideas including the use of technology such as insurtech. The regulatory sandbox allows the insurer to operate within a “regulatory lite” environment for a limited period of time, with modified rules designed to allow the captive to test the market and offer new insurance products. More importantly, the regulatory sandbox is operated within a controlled environment with an appropriate level of oversight from the BMA. Take for example the requirement to disclose the risks factors related to the experimental nature of the product they offer to relevant stakeholders including customers, which assists in the protection of policyholders, a key and fundamental objective of the BMA framework.
A tailored market
Recent geopolitical developments, socioeconomic trends, and technology improvements worldwide have created new underwriting niches where the lack of loss experience data to drive pricing could limit capacity and create a hard market in the niche. These developments include autonomous driving systems like the ones being tested by Uber and General Motors, cannabis legalisation in countries such as Canada, a rash of cyber-attacks on large companies with large banks of data stolen and exposed, and a series of terrorism events that are now more frequent although each occurrence is much less severe than 9/11. This creates new opportunities for Bermuda’s captive market, as captives could be an alternative in circumstances where the traditional insurance/reinsurance market is unable to respond with a ready solution.
The new areas of possibilities are endless; for instance, we can easily imagine that a technology company investing in autonomous driving technology may find it challenging to obtain traditional insurance coverage for damages from failure of their technology, or that a captive could be a good solution to provide health insurance coverage for cannabis prescriptions not otherwise covered by regular health insurance. Another example would be a finance syndicate looking for insurance coverage to take the credit risks out of a 30-year commercial real estate financing deal and could find a captive useful where prohibitive pricing and lack of capacity in the traditional market exists.
Bermuda’s resourceful captive market can provide tailored solutions as necessary. As fintech expands its reach into the business world, new types of cyber risks may arise that can be difficult to find coverage for in the traditional insurance markets. Bermuda’s embrace of fintech through newly introduced legislation can add another dimension as Bermuda captives have the added advantage of incorporating insurtech, blockchain and crypto currency technologies into their operations.
As new regulations and acts are enacted in Bermuda such as Economic Substance, Bermuda’s captive insurance industry has not been the direct focus of the recent tax reporting and substance initiatives from organisations like the EU and OECD due to the fact that typically, captives are not set up in Bermuda purely for tax planning purposes. Proof of this concept is the fact that many US-facing Bermuda captives have historically chosen to have a 953(d) election which makes them taxable in the US by their own choice. Further proof of this concept is that Bermuda remains one of only two non-EU jurisdictions that were granted Solvency II equivalency. This means that an EU insurer dealing with a Bermuda insurer can treat the insurance transaction as it would treat any insurance transaction with another EU insurer, as relates to withholding, movement of capital, claims and other financial considerations.
The main reasons for setting up captives in Bermuda have traditionally been centred around regulations that are sensibly applied and allow for innovation; accessibility to regulators; a ready choice of talented insurance professionals including auditors, actuaries, lawyers and insurance accountants; and the island’s excellent reputation in the global insurance/reinsurance market. Bermuda has always been a transparent and co-operative jurisdiction with 41 tax information exchange agreements (TIEA’s) in place, including the TIEA with the United States which was in place since 1986.
While the underlying fundamentals of the captive insurance market remain strong, we may see more of a shift in the nature of business undertaken in new and innovative captive formations. Bermuda’s foundation in insurance, together with its inclination to continuously develop and modernise, as exemplified by the introduction of the regulatory sandbox, should keep the jurisdiction’s captive insurance market uniquely relevant.
Alison is the Managing Director of Estera Services (Bermuda) Limited. She has a long history of sitting on boards of Bermuda companies as an independent director and provides commentary on the Bermuda Insurance, funds and investment services, and private equity industries. Alison has extensive experience in private equity transactions, derivatives, public and private company M&A activity, equity and debt markets, and partnerships in relation to both their formation and on-going transactions.
Sherman (FCCA, ARM, CIA) is an Associate Director of Estera Management (Bermuda) Limited. He principally focuses on sponsoring new Bermuda Stock Exchange (BSX) Listings, providing ongoing sponsorship for BSX-listed companies, providing insurance management and principal representative services for captives, and providing accountancy services for employee benefits trusts and other entities with special needs.
Please click here to see the original version of the article in Captive Review's Bermuda Report.
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