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Bermuda's advantages for international insurance companies registration

Offshore policies can have many major benefits for corporate clients and their beneficiaries

By Keith Archibald Forbes (see About Us).

Bermuda-based international insurers, Bermuda Royal Gazette newspaper photos

2016. February 4. Changes that went into effect on January 1, 2016  applicable to Bermuda-incorporated commercial insurers registered under the Insurance Act 1978 (the Act) are now required to establish and maintain a head office in Bermuda. This requirement means that the insurance business of commercial insurers (Classes 3A, 3B, 4, C, D and E insurers) must be directed and managed from Bermuda. At the time of licensing, the Bermuda Monetary Authority (the “BMA”) assesses the nature, scale and complexity of an insurer’s business to be conducted in accordance with the provisions of the Act, the Insurance Code of Conduct and the Insurance Statement of Principles (the insurance framework). In relation to commercial insurers, the BMA further measures compliance with the insurance framework by taking into consideration various factors to ensure that it can exercise sufficient regulatory oversight over the business to be carried on in Bermuda. In this regard, the BMA has effected the requirement for commercial insurers licensed in Bermuda to establish their head office in Bermuda. In determining whether an insurer has complied with the head office requirement, the BMA will consider, among other things, the following factors in order to ascertain whether the insurance business of the insurer is directed and managed from Bermuda:

The BMA will apply the proportionality principle when it considers the above factors in determining whether the insurer, based on the nature, scale and complexity of its business, has met the head office requirement. The head office requirement does not apply to a commercial insurer that has a permit under section three of the Non-Resident Insurance Undertakings Act 1967 or a permit under section 134 of the Companies Act 1981. These provisions cover branch operations in Bermuda for foreign insurers. In addition, Bermuda captives and limited purpose insurers (Classes 1, 2, 3, A and B insurers), as well as special purpose insurers, are not required to establish a head office in Bermuda. The requirement for a head office in Bermuda has been effected as part of the BMA’s overall enhancements to its current insurance supervisory and regulatory framework in an effort to achieve Solvency II equivalence. Solvency II is a harmonized framework aimed at ensuring that there is a single market, utilizing a single set of rules for insurance services. Solvency II equivalence for Bermuda means that Bermuda’s commercial insurers will not be disadvantaged when competing for, and writing, business in the European Union. Currently, insurers licensed in Bermuda are required to have a registered office and principal office here and to appoint a principal representative resident in Bermuda. Some have queried whether an insurer’s principal office, which is already a requirement under the Act, could be regarded as its head office. The BMA has confirmed that, where the insurer’s principal office meets the standards required for the establishment of a head office, then the BMA will regard the principal office as the head office. Commercial insurers are applying the proportionality principle as they consider the above factors in order to comply with the head office requirement. The general understanding at this time is that the factors are not necessarily prescriptive and that the BMA will take a holistic approach to deciding whether the insurer has a sufficient nexus to Bermuda to allow the BMA to exercise the requisite regulatory influence over the insurer. Commercial insurers are encouraged to meet with BMA representatives if they have specific questions relating to their plans to implement the head office requirement.

Bermuda insurance, investment, holding and other companies can incorporate, with limited liability, and set up shop quickly

They all have "Ltd" in their official corporate name. Advantages do not include no income taxes (because there is an income tax, called a Payroll Tax, payable by employers and employees, based on employment income) but there are few restrictions as to how Bermuda companies can invest their assets and deploy capital, not to mention the island's close proximity to the largest insurance market in the world, the USA. They are presently free to accept contingent commissions, which are payments to brokers from insurers based on the volume of business steered to them. These factors, along with the current favorable market conditions, have contributed to the robust financial performance of the Bermuda insurance and reinsurance market. They are exempted from Bermuda's domestic company requirements of being at least 60% beneficially owned by Bermudians. They can trade anywhere in the world except as a local company in Bermuda (They cannot write any business for Bermuda residents, only with other international or exempted companies). The regulatory environment is exceptionally favorable to them in Bermuda - so much so that many international businesses, including insurers, from all over the world, even in places such as St. Lucia, West Indies, now have their Bermuda-incorporated and Bermuda-based companies as their registered offices and their companies beyond Bermuda as their subsidiaries. They come mostly - but not solely - from the USA. One prominent US corporation, Chevron, has over 400 Bermuda-incorporated companies and there are an equal number of Bermuda-incorporated companies beginning with the word "China." Their reasons  to relocate to Bermuda as corporate inversions arise out of the USA's own tax code and/or similar taxation policies of the UK, Canada, China, Russia and other countries. The presence in Bermuda of these Bermuda-registered companies, the Bermuda Government fees they pay in return for not having any Bermuda Government taxes imposed on their income or profits and the profits they earn from their often world-wide business including acting a principal insurers in US and other jurisdictions and in major disasters such as hurricanes, typhoons and special risks, is the single-biggest reason, not tourism which lags far behind, why Bermuda, despite its tiny size of only 21 square miles or 58 kilometers, scores so highly in World Bank and related statistics in Gross National Income and other economic indicators.

Bermuda International Long Term Insurers and Reinsurers (BILTIR)

Hosts an annual life and annuity conference at the Fairmont Southampton Princess Hotel. Industry chiefs from Europe and North America join Bermuda-based executives. 2015's conference focused on the EU Solvency II regulations, which come in to force from 2016 and Bermuda’s ongoing work to comply with the new rules. Other highlights include a presentation by the president of the Society of Actuaries, which has more than 25,000 members in 78 countries. Special sessions will also look at “the future of living longer” and panel discussions featuring industry leaders. BILTIR was set up four years ago to serve as an advocate for the long-term insurance industry.

Application process, Companies and Insurance Acts apply

All in Bermuda's insurance industry are subject to the provisions of the Companies and Insurance Acts. The Companies Act regulates the activity of companies incorporated or licensed in Bermuda, including insurance-related companies. The Insurance Act is the basis for regulation of the insurance industry, both in the domestic Bermuda market and in the international arena when it affects Bermuda-based and/or Bermuda-incorporated insurance companies. It was introduced to protect Bermuda's image - and increase its world-wide credibility as an international center for insurance, captive insurance, reinsurance, and investments relating to insurance. In 2001, the new Bermuda Government position of Supervisor of Insurance was created, with full responsibility to oversee the licensing and regulation of Bermuda-based insurance companies.

Bermuda-based leading international insurer. Photo by author Keith Archibald Forbes solely for Bermuda Online.

Alternative Capital Market

2018. December 27. Bermuda is leading the way in the insurance sector’s growing alternative capital market. The large insurance losses sustained as a result of hurricanes in 2017 resulted in more alternative capital being placed in the Bermuda insurance market. Commenting on that trend, Craig Swan, the BMA’s managing director, supervision (insurance), said: “The steady growth of alternative capital within the Bermuda insurance market, particularly following the 2017 losses from Hurricanes Harvey, Irma and Maria, indicates that Bermuda continues to be a trusted centre for insurance risk securitisation. The aggregate exposure of non-life (re)insurers backed by alternative capital was approximately $51.9 billion at year-end 2017, while gross written premiums was $3.9 billion. Bermuda’s share of total capacity was approximately 58 per cent of the global alternative capital market.” To put the island’s share in to context, the global market in 2017 was $89 billion. Catastrophe bonds and collateralized reinsurance are the two dominant forms of alternative capital in the Bermuda market. At the end of last year, cat bonds accounted for $19 billion of the island’s alternative capital total, while collateralized reinsurance valued at $28.5 billion accounted for more than half of the total capacity. Other forms of alternative capital structures include sidecars, longevity and mortality bond/swaps and hybrid securities such as preference shares. Geographically, the assumed risks for Bermuda’s alternative capital vehicles was 40 per cent in the US. Although the risks were split across nine lines of business, property catastrophe, including property retrocession, accounted for 94 per cent of the gross written premiums to the end of 2017. Gross written premiums in 2017 totaled $3.9 billion. The information for the BMA alternative Capital Report 2018 was gathered from the alternative capital schedules and statutory financial returns submitted to the authority by June 30. The BMA has also released its annual captive report, offering year-on-year comparisons to the captive/special purpose insurers report of 2017. Mr Swan said: “Although not yet significant in premium size, the greatest year-on-year percentage increase was experienced by the cyber-risk line of business which saw an increase in premium of $26.3 million (rising to $42 million) a nearly twofold increase in premiums written.” He added: “These reports provide further insight and transparency about how Bermuda’s innovative (re)insurance market continues to evolve and develop.”

Capitalization, liquidity, reporting and solvency requirements

The Bermuda Monetary Authority (BMA), a separately administered division of the Bermuda Government, is the  administering and regulatory authority for all Bermuda-based and Bermuda-incorporated insurance companies. Its Monthly Assessment & Licensing Committee (ALC) reviews insurance applications. Applications are accepted or declined according to their merits or demerits. The registration and licensing procedures of approved insurance entities are subsequent to the ALC application process. 

Minimum paid-up capital in Bermuda is $120,000 for general (property, casualty, etc.) business; $250,000 for long-term (life) business; and $370,000 for both types (composite). General business insurers must maintain liquid assets (called relevant assets) equal to at least 75% of general business liabilities. Relevant assets exclude such assets as real estate investments, investments and advances to affiliates and unquoted equity securities. However, these assets are included in the computation of the Minimum Solvency Margin.

Insurance companies, or their agents, must file an annual Statutory Financial Return with the Registrar of Companies. This must include an Auditor's Report and in certain situations actuarial certification. For example, all companies writing life insurance business must have their reserves certified by an actuary. In addition, companies writing a significant of products or professional liability risks must have their reserves certified by a loss reserve specialist who in most cases will be a qualified actuary.

For general business, when net premium income is up to $600,000 or from $600,001-$6 million and in excess of $6 million respectively then the minimum solvency margin is, respectively, $120,000 or 20% of net income or $1,200,000 plus 10% of net premiums written greater than $6 million. There is also a loss reserve of 10%. For long-term business, it is $250,000. For composite business, it is a combination of the requirements for general business and long-term business.

Bermuda's insurers are in various classes of capital and surplus.  They are mentioned in more detail below. They all have specific reporting requirements, solvency margins and actuarial certification. Insurance (and other) companies can be incorporated either by registration using the provisions of the Companies Act or by private Act of Parliament. Incorporation by registration normally takes about two weeks but in exceptional circumstances can be accomplished in a matter of days. Private Acts of Parliament usually apply when the company requires special objects, powers or abilities substantially different from the menu in the Companies Act.

The latter is responsible for processing applications and recommending to the Ministry of Finance that companies be incorporated, partnerships be formed, collective insurance schemes be established and permits be issued to effect an accredited business presence in Bermuda. When the application has been reviewed by all parties, the BMA will present the application to the Ministry of Finance with the appropriate recommendations with regard to the Minister issuing a consent to register the company. The Minister may, at his discretion, impose any terms or conditions on a consent to register a company. 

More Bermuda-based international insurance companies. Photo by author Keith Archibald Forbes solely for Bermuda Online.

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.

More prominent Insurance Companies domiciled and headquartered in Bermuda

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

Can be hugely 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 & Composites

Bermuda is the principal domicile of captive insurance companies. More reside here than anywhere else. There are believed to be over 10,000 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 the following 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 or present Foreign Exchange rates

Third world countries enforce various types. Their residents are constrained from moving certain types of assets outside. Select 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. Do present Foreign Exchange rates based on where you live have a good or bad impact on your Bermuda insurance premiums and insurance-covered assets? It could be a key question. Bermuda is tied to the US Dollar.

Forced heirship avoidance

Some onshore and offshore jurisdictions or states or provinces or parts of countries may have forced heirship laws in whole or in part, such as Scotland, Quebec, etc. See http://en.wikipedia.org/wiki/Forced_heirship. They may not permit a person to disinherit certain family members regardless of the wishes of an insurer. Some of the estate may have to be allocated to a spouse and/or heir. However, these laws do not always 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.

Foreign Laws do not apply to Bermuda-incorporated companies

Only Bermuda laws apply. UK laws do not apply in any way to the operations in Bermuda of any Bermuda-registered companies. Nor do the laws of the USA or Canada or any other foreign jurisdiction apply in Bermuda. As a result, a high number of UK, USA, Canadian and other foreign-headquartered companies, including many with considerable market activity abroad, were incorporated in Bermuda.  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

However, Bermuda-based but USA-owned or USA-operated companies can sue or be sued in the USA following a US Supreme Court ruling. Also, from 2003, if relocating to Bermuda from the USA or owned by US investors, they may have to tell shareholders they may face capital gains taxes in the USA.

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.

Insurance and tax regulations are reasoned and rational - far better for corporate clientele and policyholders

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.

Insurance Premium excise taxes

Many countries and/or their regional jurisdictions require payment of premium taxes by insurers on and/or policyholders. A glaring example is the United Kingdom's Insurance Premium Tax. For details see For basic details, see https://www.gov.uk/government/publications/insurance-premium-tax-increase-to-standard-rate/insurance-premium-tax-increase-to-standard-rate and https://www.gov.uk/government/publications/notice-ipt-1-insurance-premium-tax/notice-ipt1-insurance-premium-tax. This insurance tax affects the cost of car, home  and all other insurances. It is calculated as a percentage of each premium, with those who pay the highest prices for insurance suffering the most. Bermuda-based and Bermuda-incorporated companies with a marketing presence in the UK are required under UK law to make their UK-based policy holders pay the UK Insurance Premium tax. These taxes do not benefit the policyholder. All thus incur higher costs for the insurer and  policyholder, making some jurisdictions uncompetitive.  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.

Investment alternatives can be superior

Limited Liability Companies (LLCs)

2016: Legislation, drawing upon Delaware law, has been approved by MPs in Bermuda to introduce limited liability companies (LLCs). Such vehicles would be broadly similar to Delaware LLCs.

Many countries restrict access to investment alternatives that, when properly structured, can offer significant diversification, return, and risk reduction characteristics. Switzerland 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 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.

Location of Benefit Payment

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.

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. Consider the economies of scale. Some Bermuda based international insurance companies are structured accordingly. 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.

No taxes on corporate income outside Bermuda

All the world's major oil companies and other multi-nationals too have discovered Bermuda is a suitable corporate base for their specialized captive  insurance operations. As at January 2015, at least 8,200 multinationals have their own insurance offices, managing and controlling from their offshore base their onshore insurance operations in other parts of the world. In many respects, an internal or captive insurance company operates just like an ordinary insurance company. If a company wants to insure its aircraft, cars, cranes, buildings, employees, loans,  ships, etc. its subsidiaries abroad pay their premiums to the principal's Bermuda insurance company. Whenever damage occurs, the principal's own private insurance company pays it out of the big money jar founded by these premiums. Doing it this way means huge savings by not using commercial insurers. It is by no means the only advantage. The key advantage is that insurance premiums can be deducted from the revenues. Doing so means the companies pay less tax in the countries in which they operate. And from Bermuda, the profit can be sent back, untaxed, to the corporate Head Offices abroad. In Bermuda, profits and of all Bermuda-incorporated, Bermuda-based but not Bermuda-market companies remain secret, unlike in most European and other onshore countries where they are published.

Only very basic information on companies is provided in Bermuda

There is a so-called Public Register of Companies in Bermuda but all it provides for free, via a computer or in person, is the name of the company, when incorporated and a number. For a fee, one can find out its office address in Bermuda, perhaps its Bermuda-based directors and corporate secretary, but not much else; not who owns or directs or manages it, not from where its money comes and goes, not any profits or losses.

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. A good Bermuda insurer can amend its Private Act to provide additional benefits deemed desirable in the future. Bermuda's common law system, based on British law, combined with a record of legal precedence, supports and ensures the legality of an insurer's Private Act. 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.

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.

Solvency II Compliance

Effective March 24, 2016. This means the European Union considers the standard of the island’s insurance regulation to be equivalent to its own. In November last year, the European Commission recommended that Bermuda should be considered as in line with the tough new insurance rules being adopted across the 28-country bloc. A 90-day consultation period that gave member countries and the European Parliament the chance to have their say has now passed. On March 4, the EC’s delegated decision on Bermuda’s equivalence with Solvency II was laid out in detail in the Official Journal of the European Union. Now that 20 days have passed since the date of publication in the Journal, confirmation of Bermuda’s new status is complete. Solvency II equivalence means that commercial insurers and reinsurers based in Bermuda will not be competitively disadvantaged when they do business in the European Union. The news represents a significant achievement for Bermuda’s financial-services regulator, the Bermuda Monetary Authority, which has worked and lobbied for more than six years to achieve the goal. In an interview today, Jeremy Cox, chief executive officer of the BMA, paid tribute to his “tenacious team”, as well as the industry leaders and politicians who had helped to make it happen. A full story on the interview will appear in Monday’s Business section of The Royal Gazette. The BMA also released its 2016 Business Plan today. In his introduction, Mr Cox stressed that equivalence confirmation did not mean the BMA would suddenly have a lot of spare time on its hands. “Securing equivalence was clearly a major achievement, a powerful example of what can be accomplished with a strong, tenacious team that embarked on the road to equivalence in 2010,” Mr Cox said. But equivalence is an interim objective, rather than an end in itself, and should be viewed in the wider context of our vision and strategic goals.”

Bermuda complies and benefits.  Solvency II refers to a European Union Directive (2009/138/EC) relating to insurance regulation. Solvency II became effective on 1 January 2016 and provides new rules with respect to capital requirements, governance, risk management, and disclosure in relation to insurers and reinsurers. The regulatory changes resulting from the implementation of Solvency II include, but are not limited to, the following three pillars:

• How insurers quantify their liabilities and assets, including the way a company reserves funds to satisfy policyholder claims.

• How the structure and management of insurance businesses are governed, enabling insurers to identify, quantify, monitor, successfully manage and report risks to which they are exposed.

• Ensuring that robust reporting and disclosure rules are in place to foster transparency for insurers reporting on their business.

Following a demonstration of interest from the Bermuda Monetary Authority (BMA), the Bermuda Government's regulatory agency for Bermuda-registered insurance companies, the European Commission tasked the European Insurance and Occupational Pensions Authority (EIOPA) in 2010 to provide a preliminary assessment of the BMA’s supervisory regime. The goal was to have EIOPA determine whether the BMA’s supervisory regime satisfied the general criteria for third-country equivalence (i.e. non-EU member state equivalence). In an effort to gain equivalence, the BMA has, over a period of six years, fortified and revised its approach to insurance regulation in such a way as to bring the regulation of Bermuda’s commercial insurers (ie those registered as Class 3A, 3B or 4, C, D or E) in line with Solvency II. In several follow-up reports, EIOPA advised that Bermuda’s regulatory framework for commercial insurers was broadly equivalent with the Directive, paving the way for formalization of equivalence. This came in the form of a delegated act adopted by the European Commission on November 26, 2015 (Delegated Act). The Delegated Act came into force on 1 January 2016 (subject to a three-month review period by the European Parliament and European Council), and grants full equivalence to Bermuda for an unlimited period. In summary, the Delegated Act is essentially the EU conveying that they acknowledge the Bermuda commercial (re)insurance and group supervisory regimes to be equivalent to that of the EU, and on that basis, Bermuda (re)insurers and groups are free to conduct business in the EU without additional regulatory requirements/burdens. The BMA’s approach to insurance regulation is not strictly EU-centric. International regulatory input is derived, in part, through membership in various international standard setting bodies relating to insurance regulation such as the International Association of Insurance Supervisors (IAIS), the International Organisation of Securities Commissions (IOSCO), and the Group of International Insurance Centre Supervisors (GIICS). The BMA has also entered into a multilateral memorandum of understanding with, and is a charter member of, the International Association of Insurance Supervisors (IAIS). Locally, the BMA is able to derive input from a variety of sources including insurance and reinsurance companies, law firms and other organisations such as the Association of Bermuda Insurers and Reinsurers (ABIR), the Bermuda International Long-Term Insurance and Reinsurance Association (BILTIR), and the Bermuda Insurance Management Association (BIMA) to name a few. With the Delegated Act passed and in-force wef January 1, 2016, Bermuda registered (re)insurance companies and groups are able to conduct business freely within the EU, and on an even playing field with existing EU insurance companies. As the economic output of the EU represents a quarter of the global economy (measured in terms of GDP), ease of operations for our (re)insurers and groups in the EU is an important asset, one that many competing offshore jurisdictions are without.

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.

All classes have minimum capital, surplus and more. 

Class One Insurers

Insurers and reinsurers not in Class 1, 2 and 4. This grouping has been reclassified. The minimum capital and surplus requirement is $100,000,000 and the actuarial certification requirement is yearly. It 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. There are now  further sub-categories within the Class 3 group, based on their respective risk profiles. Risk-based supervision of these firms has been refined, to ensure they receive the level of oversight that is appropriate to the nature of their business.

• Class 3A - Small commercial insurers whose percentage of unrelated business represents 50 percent or more of net premiums written or loss and loss expense provisions and where the unrelated business net premiums are less than $50 million.

• Class 3B - Large commercial insurers whose percentage of unrelated business represents 50 percent or more of net premiums written or loss and loss expense provisions and where the unrelated business net premiums are more than $50 million.

Compliance of the regulatory system

The regulation of the insurance business is a joint effort of the Bermuda Government and the industry. The Insurance Advisory Committee is appointed by the Minister of Finance and chaired by a member of the industry. Other members represent underwriters, brokers, managers, accountants, actuaries, the domestic market, the Insurers Admissions Committee and consultants. Insurance regulation became a function of the Bermuda Monetary Authority from 1 January 2002. There are standing sub-committees dealing with strategic planning, legislative review and marketing.

Confidentiality

All financial information submitted to the Registrar of Companies is protected by the confidentiality provisions contained in Bermuda Law.

Fees insurance companies pay under Insurance Act 1978

See the Bermuda Government website for its Registrar of Companies.

Timeline of how the local Bermuda Insurance industry began

1903, a group of Bermudians formed Bermuda Fire and Marine Insurance Company for the sole purpose of insuring fire and marine risks within Bermuda.

1947. Not until after the Second World War was the next insurance company started, Kitson Insurance. 

1950. Argus Insurance was established through a need for medical insurance and formed the Somers Isles Insurance Company.

1958. Colonial Insurance Company was founded, developed from The Gibbons Company car dealership. Directors deemed it logical and profitable to insure the cars they sold.

1962. The international insurance sector in Bermuda began when the idea of captive insurance companies was born. Up until that time the overseas insurance industry controlled the terms, conditions and rates of the global insurance marketplace. Large companies like Coca Cola realized that if they formed their very own insurance company, they not only knew what their risks were, but could also keep and invest their own premiums (cash) and keep it in their own companies if they did not have any claims within the year. The person who invented captive insurance was Fred Reiss, who happened to meet two Bermudian businessmen overseas and they suggested he bring his idea to Bermuda. Fred Reiss is credited with coining the term "captive" when he formed a management company in Bermuda, International Risk Management Limited ("IRM"). From that single idea captive insurance became the bedrock of the Bermuda international insurance industry. With the help and support of individuals in the local banking, accounting and legal professions, Reiss persuaded many of his corporate clients to form captives, to free themselves from an insurance market which was perceived to be unresponsive to their needs. Reiss showed his clients how to use the captive mechanism to capture some of the profits from their insurance expenditures. By domiciling the captive in Bermuda, those profits could accumulate free of income tax and, therefore, accelerate the growth of capital in the company. Over time, the captive would be able to retain a larger share of its parent’s risk and, through prudent use of reinsurance, create flexibility and stability in the insurance-buying process in what was a cyclical business. Understandably, this concept was not popular with either traditional insurers or brokers, who viewed it as a movement which would cut them out of a significant portion of business. Consequently, Reiss found it difficult to get broad acceptance of his ideas. The slow rate of captive development continued throughout much of the decade until, disturbed by instability in the Bahamas, several oil companies decided to move their captives to Bermuda. These large multinational corporations were clients of America’s multinational insurance organizations, the most prominent of which were AIG, INA and AFIA. The latter two were later merged into CIGNA, whose general business was, itself, recently merged into ACE. Through their networks of agencies around the world, they provided facilities to allow the captives to reinsure their parent-related business and even provided management services to some of the captives.

1978. As the insurance industry started to grow, Bermudians realized that it needed to be regulated properly and in 1978 the Insurance Act was passed by Parliament. Following this, the Insurance Advisory Committee (IAC) was established, made up of people representing insurance companies, legal firms and Government regulatory agencies such as the Bermuda Monetary Authority.

1985. ACE was formed by a group of 34 US companies to provide third-party liability coverage to protect them against the risk of lawsuits. They were unable to buy this type of coverage elsewhere because of the very large awards being handed out by the US legal system - people slipping on supermarket floors; suing fast-food restaurants for their coffee being too hot, etc.

1986. XL Capital was formed, based on the same principles as ACE. This was the beginning of the next stage of Bermuda's development as an insurance centre.

1990's. Bermuda-based international insurance and Bermudian insurance companies found that there were not enough insurance companies to insure everything they wanted risk coverage for, so once again Bermuda provided the infrastructure necessary to allow new property catastrophe reinsurance companies to form. Mid Ocean Reinsurance was the first property catastrophe reinsurance company formed in response to this severe lack of capacity. Bermuda authorities knew that with the increasing amount of insurance and reinsurance capital on the Island, there needed to be strong rules for conducting business, so the IAC continued to update the Bermuda laws.

From 2000.  The Bermuda insurance marketplace began to build a reputation for being innovative. Therefore, whenever companies or clients were in search of solutions to their problems, they came to Bermuda. The increasing number of global insurance and reinsurance companies with a head office in Bermuda continued to cement the Island as a major insurance hub.  

2007. March 27. It was reported Bermuda has lost out to the likes of Guernsey and Ireland when it comes to attracting captives linked to UK companies. A survey showed Bermuda’s share of the UK-generated captive market declined from 19 percent to 15 percent, while Guernsey and Ireland increased their share of the market significantly. The reason for the changing fortunes appears to be down to the ability to secure the same benefits in offshore jurisdictions much closer to mainland UK. Also, Malta is expected to increase its number of captive formations as it benefits from its membership of the European Union. The report on the growing popularity of captives with UK companies surveyed 94 of 350 identifiable captives owned by UK companies. In the 11-year period used for comparison Guernsey’s share of the market increased from 42 percent to 50 percent and the Republic of Ireland’s from two percent to eight, by contrast Bermuda’s decreased by four percent, the Isle of Man’s share dropped from 31 to 21 percent and Jersey and Gibraltar remained on one percent. The two other significant jurisdictions of Vermont and Cayman both dropped from two percent to one percent in the survey.  

2007. July 20. Bermuda's leading role in providing reinsurance cover to the USA was underlined by the latest-to-date report from the Washington DC-based Reinsurance Association of America (RAA). It reported the US ceded $54.7 billion in premiums to offshore reinsurers in 2006 and ceded recoverables of $114.2bn. The largest markets for unaffiliated premiums ceded and recoverables due were Bermuda, the United Kingdom and Ireland, Germany, Cayman Islands, Switzerland and Barbados. One concern raised by the RAA was the possibility that US companies may be at risk because of offshore reinsurance deals. "It is especially important in light of the current public policy debate regarding the reduction in collateral requirements for unlicensed, unauthorized reinsurers that are not subject to US regulatory and solvency requirements," states the RAA. "The outcome of this policy debate could have significant implications to the solvency of US companies, as reinsurance recoverable from offshore companies continue to increase." The RAA prepared a comprehensive report, entitled the Offshore Reinsurance in the US Market: 2006 Data, which tracks trends in the buying of reinsurance as it impacts the US and aims to provide policymakers and the public with data and analysis about the US reinsurance market. Figures show there has been a 11.9 percent decrease in the level of premiums ceded from the US to offshore reinsurers between 2005 and 2006, and a 7.8 percent decline in recoverables. "Offshore companies' share of US unaffiliated reinsurance premium increased to 53.1 percent from 51.8 percent, while the market share of offshore companies and US subsidiaries of offshore companies decreased to 84.5 percent of US unaffiliated reinsurance premium from 85.4 percent," said the RAA. The organisation notes that total US premiums ceded to affiliated offshore reinsurers decreased by 16.3 percent to $32.5m while net recoverables due from affiliated offshore reinsurers increased 2.8 percent to $70.8bn. The RAA warns: "Data suggests the current US regulatory environment and 100 percent collateral requirements for unauthorized reinsurers is not a significant barrier for offshore companies as they account for more than half of the US unaffiliated reinsurance market. "An offshore company can participate in the US market by becoming licensed in the states in which it does business, by establishing a US affiliate licensed in the states in which it does business or by posting collateral in the US. In 2006, offshore companies and US subsidiaries of offshore companies accounted for 84.5 percent of the US reinsurance market."

2007. October. The capitalization of Bermuda's reinsurance industry rose more than 20 percent to reach $129 billion by the end of the third quarter of 2007. That was greater than the 2006 gross domestic product of many countries, including Pakistan and New Zealand and oil-producing Nigeria, according to International Monetary Fund (IMF) figures. In 2007 lack of catastrophes enabled the Island's reinsurers to pay out less in claims and retain more of their earnings. Reinsurers managed to return $9.4 billion to shareholders in 2007, a 200 percent increase over 2006. In addition, more than $2 billion in share repurchases were executed. Reinsurance rates for January contract renewals had fallen by nine percent world-wide, driven by excess supply and fuelled by a combination of strong profits and low losses. 

2008. Early. The face of insurance company regulation in Bermuda changed after Government passed the Insurance Amendment Bill in the House of Assembly. The new bill made a number of changes to the Insurance Act 1978, allowing the Bermuda Monetary Authority (BMA) to prescribe standards for an enhanced capital requirement and a capital and solvency return for insurers to comply with, and making new provisions for classes of insurance companies and Special Purpose Insurers (SPIs). It also allowed for the provision of additional financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) by Class 4 insurers. The changes came about through a consultation and from International Monetary Fund Offshore Assessment recommendations carried out in 2003 and published in January 2005 to evaluate the regulation of the banking, insurance and securities sectors on the Island and review the financial services legislation and identify steps to be taken to improve the country's regulatory framework. The amendments will further enhance Bermuda's regulatory framework and ensure that it keeps up with the evolving international standards. The amendment to GAAP reporting for Class 4 insurers would be extended by the BMA to Class 3 commercial sector insurance companies after a recategorisation of the Class 3 section had been completed as per the timeline set out in the Authority's 2009 Business Plan. The recategorisation of Class 3 insurers, meanwhile, will separate the captive and commercial insurance firms, redefining the Class 3 sector and forming two new sub-classes, namely Class 3A and 3B to allow the BMA to supervise and regulate each range and type of insurer consistently.

2008. April. Bermuda's insurance industry was worth a staggering $6.8 million per person, if its total aggregated assets of $440 billion were distributed among the Island's population of 64,000. The report by the Bermuda Monetary Authority (BMA) reveals that the Island's insurance sector was in good shape despite a softening global market after boosting its aggregate total assets by 33 percent, while increasing its gross premiums written to the tune of more than $15 billion. The BMA's findings show that the Island's insurers reported aggregate total assets of $440.4 billion over the past year, compared to $329.9 billion the previous year. Gross premiums written totaled $115.8 billion for the year, surpassing the $100.7 billion written the prior year. Of these amounts, captives accounted for $72 billion in total assets and almost $22 billion 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 BMA reported. The fall in registrations reflected the generally softer market conditions globally, which saw a slowing of captive incorporations. In such conditions, companies typically are able to purchase reinsurance coverage at competitive rates in the traditional commercial markets. According to the BMA, 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. 

2011. There were 504 Class 3 companies with total capital and surplus of more than $66.7 billion at year-end, with the firms writing more than $42 billion in gross premiums and representing about 34 percent of the total number of active insurance companies in the jurisdiction. In terms of SPIs, Bermuda Premier and Minister of Finance Ms Paula Cox recommended that an SPI's minimum share capital be set at $1, the margin of solvency requirement will require that the asset of an SPI exceed its liabilities, an SPI will only be permitted to write 'special purpose business', and will be allowed to fund its insurance liabilities through a debt issuance or some other form of financing approved by the Authority. Furthermore, she added that a recent study published by Swiss Re indicated that the Insurance Linked Securities market was worth $38 billion in 2007 and is projected to grow to $200 billion in 2013 and $600 billion in 2017.

2013. August 23. More than a third of the world's top 50 reinsurers are based in Bermuda or have a major operation here. PartnerRe is listed as the tenth largest reinsurer globally in terms of gross premiums written. AM Best's latest list of the Top 50 Reinsurers 2012, released  yesterday, showed that Bermuda commanded a substantial 14 percent share of non-life (property and casualty) gross premiums written globally. Switzerland and the Asia-Pacific also each had 14 percent shares. Germany wrote the most with a 24 percent share, while the Americas region had a 12 percent share. The AM Best report further showed that one Bermuda-based re/insurer jumped five spots in the rankings. Arch Capital Group, based at Wessex House on Reid Street, reached the No. 30 spot in 2012 as it increased premiums by 28 percent. This was mainly on growth across all reinsurance lines of business, but particularly due to the full year of premiums from other lines, which included mortgage reinsurance and significant growth in property, excluding cat and casualty reinsurance. These opportunities are somewhat unique, but being selective and opportunistic is in Archs DNA, AM Best said. The highest ranked Bermuda re/insurer was PartnerRe at No. 10, followed by Everest Re at No. 11, XL Group (Dublin-based) at No. 16., and Catlin Group at No. 23 and Axis Capital at No. 24. ACE (Zurich-based) ranked no. 36. The report also showed that despite a number of major loss events in 2012 (including Superstorm Sandy, US tornadoes, wildfires and severe droughts), most reinsurers, including the Bermuda companies, delivered underwriting profits and solid earnings. Combined ratios (a measure of profitability) for most were below 100, driven in part by continued reserve releases and well-diversified books of business, AM Best said. Capacity for the industry remains strong, as outside investors continued to pour money into catastrophe bonds, sidecars and other structured products. In 2012, close to $8 billion in capital went into sidecars and cat bonds alone, compared with about $6 billion in 2011. Such investments in 2013 are on track to beat 2012 figures. Lloyds secured fourth place, moving up from fifth in 2011, as premiums grew 16 percent, an increase attributed to growth in treaty reinsurance and facultative property. At the same time, Berkshire Hathaway slipped to fifth place, in part due to the end of its 20 percent quota-share agreement with Swiss Re, the agency said. The full impact of that change was tempered by new opportunities Berkshire found in Asia after the cat losses in 2011. Tokio Marine moved up four spots in 2012 to reach No. 22. The company continued to focus on growing international business, particularly in commercial speciality and in standard reinsurance lines in the United States. Also worth noting in the ranking are companies that lowered premiums slightly in 2012, likely through continued underwriting discipline under current market conditions, AM Best said. However, American Agricultural Insurance Co., and Bermuda's Axis Capital, Maiden Holdings, Validus and Platinum Underwriters all dropped several spots in the ranking as they employed cycle management and elected to slightly reduce premiums compared with 2011. Companies that exited the ranking included Flagstone, which was acquired by Validus, and Ariel, which was sold in pieces to several companies. AM Best noted that it appears that Bermuda's Enstar a significant run-off specialist will enter reinsurance through its recently announced acquisitions of Arden Re (formerly Ariel) and Torus. It will be interesting to see how much scale Enstar can gain, AM Best said. Newcomers to the top 50 include Milli Re from Turkey and Wilton Re. Given the abundant capacity in the industry heading into 2013, rates continue to be under some pressure, particularly for areas that have experienced no losses over the past few years, AM Best said. Overall returns are increasingly dependent on underwriting as interest rates remain at historical lows and pricing continues to show signs of softness. The January 1 renewal season saw pricing flat to increasing in the low single digits. April pricing was up slightly, particularly for loss-impacted contracts. However, June 1 renewals saw prices decline as much as 20 percent for some programs. These are the rankings of the re/insurers actually based or incorporated in Bermuda: PartnerRe (10); Everest Re (11); Catlin (23); Axis Capital (24); RenaissanceRe (28); Arch Capital (30); Aspen (32); White Mountains (33); Validus (34); Endurance (35); Alterra (38); Maiden (40); Allied World (42); Montpelier Re (43); Platinum Underwriters (47); Wilton Re (48).

For more information, consult

Authored, researched, compiled and website-managed by Keith A. Forbes.
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