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Bermuda's Insurance advantages

Offshore policies can have major benefits to clients and beneficiaries

By Keith Archibald Forbes (see About Us) exclusively for Bermuda Online

To refer by email to this particular file, please use "bermuda-online.org/insuranceadvantages" as your Subject.

See Insurance Business legislation in Bermuda. The following can apply to Bermuda approved and licensed insurance companies with a physical presence and office in Bermuda and offering staff who, if not Bermudian, have an approved, current Work Permit to work (solely) for that office.

Unlike in the USA from where the vast majority of companies come for corporate inversions in Bermuda, there is no legal requirement in Bermuda for their CEOs to personally certify their company's financial results if of the requisite size, but some of the better ones do so on a voluntary basis.

A Bermuda insurance company's ability to comply with insurance and tax regulation in the policyholder's country can provide significant advantages. For example, it is possible for a USA domiciled policyholder to be provided with a policy that is federal tax compliant yet not subject to individual state regulatory perfidy. Likewise, in Switzerland, Swiss companies do not offer unit linked, indexed, or variable type products. But they can be acquired through a good Bermuda based international company. To varying degrees, many countries offer benefits for the owners and beneficiaries of insurance policies. In certain countries, premiums themselves are deductible for tax purposes and, in others, policies wrap investment oriented products that expand the tax deductibility of premiums paid which can include dividends, capital gains, and total investment return. Another major advantage is the deductibility or exclusion from estate taxes when benefits are paid.

For some beneficiaries, location of benefit payment can also be of great interest. Because these issues vary significantly from country to country and region to region, the efficient global structuring of the affairs of the client to maximize such benefits can provide strategic advantages. Recent innovations by issuing companies, supportive domicile insurance regulation and country specific statutory legislation have also been provided to enhance the benefits of insurance.

Best returns on fixed annuities

A major advantage of reduced policy costs is that for fixed or guaranteed rate policies, the policyholders may be provided with an increased investment return without any additional investment risk. If operating costs are reduced by one percentage point from various sources then that reduced cost can be provided to the fixed policyholder.  Passing on this benefit is one of the purposes for the creation of a Bermuda based international insurer.

Business Interruption (BI) insurance

Not the highest profile but in can be the most important. Basically, it is the amount paid to the insured, usually based on the gross profit that a business would earn if trading normally, in the event of a disaster, even if it has to wait for reconstruction. In the case of law firms it covers gross fees that would have been earned. Maximum indemnity periods can vary hugely, from 3 to 36 months.  Can also include Increased Costs of Working (ICW) should a business wish to continue trading from alternative premises.

Captives

Bermuda is the principal domicile of captive insurance companies. More reside here than anywhere else. In 2002, Bermuda got 20 percent of all captives formed, according to the Captive Insurance Company Directory. Now there are believed to be over 5,000 captives worldwide. Other jurisdictions with industry growth include the Cayman Islands, Vermont, Guernsey and British Virgin Islands. Captives in Bermuda are 65% owned by American interests, 18% by European, 10% by British, 2% by Far Eastern, 2% by Canadian and 3% by other countries' principals.

In Bermuda, there are five categories, all of which serve different clientele and purposes. There is also a single general class of companies dealing with captives. A summary is below.

Agency

Formed and owned by one or more independent insurance agents to write high quality risks that they control.

Association

Formed and owned by members of a common industry or trade association to share risks of that industry among its members. 

Captive of insurer

Single parent captive by a professional insurer or reinsurer.

Captive writing 3rd Party business

Captive writing a portion of its net premium from risks unrelated to the business of its owners and/or affiliates.

Composites

Insurance company writing a composition of life and general business.

Finite Insurer and/or Reinsurer

Company writing unrelated risks where there are (a) clearly defined aggregate limits and (b) premiums that reflect the underwriter's anticipated investment income.

Health Care Captive

Owned by a hospital or health maintenance organization (HM0) and writing the risks of its owners and/or affiliates.

Long Term (or Life) Insurer and/or Reinsurer

Insurance company writing life risks as a direct writer and/or insurer.

Multi Owner Captive

Owned by two or more unrelated persons or organizations and writing the risks of its owners and/or affiliates.

Professional Insurer and/or Reinsurer

Insurance company writing unrelated risks as a direct writer and/or insurer.

Pure Captive

Single parent captive writing only the risks of its owner and/or affiliates.

Rent-a-Captive

Owned by unrelated persons or organizations and providing captive facilities to others for a fee. Contract documentation is usually detailed and voluminous and there is substantial work in maintaining individual program funds in segregated accounts, etc.

Confidentiality with privacy

First, the policyholder does not need to disclose the existence of the policy to any entity. Many onshore jurisdictions require their residents and citizens to report the existence of any bank, financial, securities or investment accounts held in foreign jurisdictions or any interest in a foreign trust. The invasiveness of these requirements is obvious as is their potential for use as evidence. Failure to report, even unintentionally, is a crime with significant penalties. Generally, most jurisdictions do not view insurance policies as financial assets, but as contracts under statutory law.

Therefore, insurance policies are generally exempt from disclosure because they are recognized as a contractually based agreement between the individual and an insurance company and not as a financial account. An appropriate insurance policy can give the policyholder additional confidentiality and privacy through a "Private Act" Confidentiality clause. Unless directed by the Bermuda government, it is required by Bermuda law to withhold all information relating to any policyholder or policy regardless of the stature of the person doing the questioning, All disputes over disclosure will be physically adjudicated in Bermuda under Bermuda law.

Design flexibility

Many countries and their regulators require extensive filing of policies, policy forms, actuarial documentation, and regulatory compliance which can reduce the ability of an insurer to respond to the needs of policyholders. Many insurance regulators also limit the number of policy types. Standardization suggests all policyholders have the same needs, timing, risk and return requirements. This is a mass market approach where large groups of policyholders are assumed to have identical needs and requirements. But a good Bermuda company may provide customized and personalized policies to its policyholders. Ask if your insurer can offer policy design and elements imaginative policyholders may need.

Bermuda insurance provisions and a Private Bill statute can provide significant protection to policyholders along with annual actuarial and audit requirements, yet without a regulatory bureaucracy that significantly constrains the quality and increases the costs of policies to its policyholders.

Estate planning

Insurance policies offer better advantages than a trust and are superior to drafting a will. The death benefits may avoid the process of probate and help ward off potential lawsuits from dissatisfied heirs. Drafting an insurance policy can also be cheaper than a trust or a complicated will. Insurance is an element of estate planning. But many advisors may not  have explored the global advantages available to their clients and accepted the constraints associated with many onshore jurisdictions.

The insurance policies of a good Bermuda company can allow a policyholder to avoid problems.

Exchange controls

Third world countries enforce various types. Residents of such jurisdictions are constrained from moving certain types of assets outside. Select a place where you have freedom. Recognize that insurance policies are based on contracts between the insurance company and the policyholder. Many domestic regulations do not recognize life insurance as a financial asset. Policyholders resident in jurisdictions that do not impose exchange controls may benefit appreciably. Cross border relocation with the use of global insurance products allow such individuals to optimize their insurance coverage internationally.

Forced heirship avoidance

Some onshore and offshore jurisdictions have forced heirship laws. They do not permit a person to disinherit certain family members regardless of the wishes of an insurer. A certain portion of the estate must be allocated to each heir. However, these laws do not consider an insurance policy to be part of the estate (unless the estate is designated as beneficiary). Thus the policyholder may bequest the proceeds of an insurance policy based on the owner's wishes.

In kind premiums & benefits

Insurers in most countries cannot accept premium payments other than in local currency. Under certain circumstances, a good Bermuda company can structure a policy which will allow the contribution of premiums to be made in kind. This means assets other than cash. This offers significant flexibility for clients who have the need for the advantages of various types of insurance policies yet choose not to liquidate significant assets to acquire insurance benefits. Payment in kind can take the form of securities, business interests, real estate - both earning and not earning.

Investment alternatives can be superior

Many countries restrict access to investment alternatives that, when properly structured, can offer significant diversification, return, and risk reduction characteristics. Switzerland, for instance, does not by regulation allow variable or unit linked products to be offered by its domestic insurance companies. It restricts investment opportunities available to Swiss nationals. In the USA, variable products are available only to the extent  they are invested in registered mutual funds with the Securities & Exchange Commission which invokes significant additional investment restrictions. Other countries require that investments of the insurance companies be restricted by regulation of quality, type, country, region and even government. But Bermuda insurance law and a good Bermuda based international insurer can provide a degree of flexibility not available in most other countries.

Lower costs in certain cases

The costs of providing efficient insurance products is constrained by insurance regulation, administrative expense, capital reserve costs and company taxes  controlled by the insurance company's domicile, tax and regulatory environment. These vary. While they may provide protections, they may also produce significant costs and efficiencies in certain circumstances. The European Union, Japan, Australia and the United States are examples.  Their costs have increased dramatically. (It must be understood that they have also risen hugely in recent years in Bermuda, so much so that the overall cost of living in Bermuda, which is about three times more than in the USA and more than twice the cost of living in Canada, must be taken into account). An often overlooked issue is the lack of economies of scale. It is universally believed that large numbers provide lower costs.

 This may be true for the average and below average number of policyholders, but those policyholders who are average or above in number often pay dearly for it in premium costs relative to asset size. Thus, an insurance company with 100 policyholders who represent 50% of the premium income of the company will contribute to the support of the other 10,000 policyholders who represent the other 50%. Average costs are reduced but at the expense of the larger policyholders. Some Bermuda based international insurance companies are structured so that these lack of economies will not occur. This is because of relatively large minimum policy requirements. Fewer large policies produce lower costs to those policyholders than the same company with large number of smaller policies. Additionally, capital reserve costs in many established domiciles also lead to increased costs. The use of separate accounts by a particular Bermuda based international insurance company can isolate policyholders from creditors and litigants. This can provide lower capital requirements for the company and higher returns or better protection or both to the policyholder.

Premium excise taxes

Many countries, or their provinces and states or counties, require payment of premium taxes by insurers on behalf of policyholders. A typical example is the United Kingdom with a 17.5 % insurance premium tax on all insurances, even travel insurance, of great annoyance to many UK policy owners. Overall, the taxes do not benefit the policyholder. They vary in effectiveness and benefit. All ultimately produce higher costs for the insurer and  policyholder. They range from one 0.5 to 17.5 percentage points of premium paid.  In some countries, such as the USA, the purchase of a non American insurance policy outside the USA by an American requires the payment of a federal excise tax equal to 1% of the premium paid. It is not clear if this tax is tax deductible for Americans or even constitutional. Policyholders should get domestic USA tax advice in payment of this.

Private Bill enhancements

Get a unique combination of benefits when a Bermuda insurer is enacted by Private Act of Parliament. The provisions provide more guarantees and benefits to policyholders and are protected by Bermuda law. When private acts from other jurisdictions appear to provide superior benefits, they may have been legislated without legal precedence or with only a thin veneer of legal expertise. Bermuda's common law system, based on British law, combined with a record of legal precedence and depth of expertise physically located locally, supports and ensures the legality of an insurer's Private Act.

This is especially so when drafted by a good Bermuda law firm and vetted by a dedicated government committee. The Bermuda judiciary has the depth and experience to adjudicate any legal challenges. Within Bermuda, litigants may initiate a first tier appeal. A second tier appeal is accorded by the Privy Council, the highest court in the United Kingdom. Thus, policyholders can rely on the sovereign law of Bermuda to protect their rights and benefits from claimants of other jurisdictions. A good Bermuda insurer can amend its Private Act to provide additional benefits deemed desirable in the future.

Protection from false claimants

Pro plaintiff onshore jurisdictions have opened a floodgate of litigation by providing numerous and overreaching remedies to governments, tort litigants, creditors and other plaintiffs who seek the assets of a policyholder or beneficiary. In direct contradiction to existing legal precedence, this often includes the invasion of insurance policies to satisfy their claims. The mere threat of such litigation can be an expensive exercise. Under a Bermuda Private Act, insurance policies and their underlying assets cannot be seized by any creditor of the policyholder or the beneficiary except under certain circumstances under Bermuda law (see Private Act, Protection from False Claimants). Any disputes arising thereof must be physically adjudicated in Bermuda. Thus, policyholders and beneficiaries may be assured that the proceeds of the policies can be passed on intact in accordance with the wishes of policyholders. They can get protection from frivolous law suits.

Separate Account Protection

Separate Accounts are offered by insurers from many established domiciles with varying degrees of success and purpose. Some insurers provide them simply to separate the risks and returns of a policyholder or group of policyholders. Other insurers may try to use Separate Accounts to provide protection from creditors, litigants and heirs. Few insurers can combine and provide these benefits by regulation and statutory law. Check to see if the Private Bill that established an insurance company in Bermuda you know and like has remedied and enhanced these issues. It is certainly possible with the use of the separate account option provided by such a company in Bermuda to benefit from these consolidated areas in one company in one country.

Trust like powers

Insurance policies have long been a stable part of global financial planning as a party to or included in trusts and trust products. Insurance policies offered by a good Bermuda insurer can be written to provide trust like benefits without the drafting, custodian, trustee, on going legal, regulatory or reporting requirements associated with a trust. As established countries such as Germany, Luxembourg, Switzerland and the United States attempt to extend trust regulation extra territorially, the benefits of trusts will diminish and the value of contractually established insurance policies will be enhanced.

For more information, consult