Bermuda: Quo Fata Ferunt

By Alex Potts, Partner, Sedgwick Chudleigh, Bermuda (01/09/2014)

The last 12 months witnessed significant regulatory and legislative developments in Bermuda, of relevance to the financial service sectors of insurance, reinsurance, insurance linked securities, investment funds, banking, and the management of publicly listed companies.


By way of context, 2013 represented a year of change in Bermuda’s local politics. It was the first year in power for Bermuda’s One Bermuda Alliance (OBA) government, which had won the national election in December 2012 with a narrow majority vote.


Although Bermuda has a long history of political and legal stability, and international business had thrived in Bermuda under previous administrations, the OBA government has indicated that it is committed to the growth of international and local business in Bermuda, with a view to strengthening and diversifying the economy, and creating new jobs, as Bermuda recovers from the global financial crisis. The recent legislative developments reflect those goals, while also ensuring that Bermuda’s regulatory and compliance framework continues to satisfy relevant international obligations.


Insurance Linked Securities (ILS)


There was significant growth in the Insurance Linked Securities (‘ILS’) market in Bermuda in 2013. The growth was credited in part to the market taking advantage of the Insurance Amendment Act 2008, which had introduced a regulatory regime in 2009 that was specifically designed with ILS products in mind.


The combination of a supportive regulatory environment, along with experienced professionals based in Bermuda, has resulted in an exciting period of ‘convergence’ between the (re)insurance and capital markets, as investors have looked for attractive returns in sectors, such as catastrophe risk, whose financial performance is not correlated to the rest of the financial markets.


Given the volume and size of transactions flowing through the jurisdiction, Bermuda now has a credible claim to be one of the world’s leading centres for the creation, listing and servicing of ILS, including through the use of Special Purpose Insurers (SPIs), catastrophe bonds, sidecars, industry loss warranties (ILWs), collateralised reinsurance products and Segregated Accounts Companies (SACs), as well as ILS funds.


Insurance and Reinsurance


In addition to the growth of ILS products (which have offered both competition and opportunities for traditional (re)insurers based in Bermuda), there have been a number of developments in 2013 of interest to insurers and reinsurers.


Bermuda was granted conditional qualified jurisdiction status by the US’s National Association of Insurance Commissioners (NAIC), effective as of 1 January 2014, along with only Germany, Switzerland and the United Kingdom. Approval under the NAIC Process now means that reinsurers licensed and domiciled in Bermuda will be eligible to be certified for reduced reinsurance collateral requirements under the NAIC’s Credit for Reinsurance Model Law.


The Bermuda Monetary Authority (BMA) proposed refinements to its standard capital model, the Bermuda Solvency Capital Requirement (BSCR), in order to reflect the risk characteristics of Bermuda’s commercial insurers more effectively. The refinements covered several broad areas including investment risks and credit risks. In particular, the BMA updated the model in relation to property and casualty insurance business. A test model was circulated to assist companies to assess the impact of the proposals on their business, and a final working model was published at the end of 2013. The BMA also made modifications to the BSCR model specifically for Long-Term insurance business, to address several broad risk areas including: investment risks, credit risks, longevity risks, and variable annuity risks.


The BMA proposed amendments relating to reporting requirements for the Insurance (Prudential Standards) Solvency Requirement Rules for all classes of commercial insurer. Revised rules for Eligible Capital, Group Supervision and Insurance Group Solvency Requirements were also introduced, effective as of 1 January 2014. Amendments to the Insurance (Eligible Capital) Rules 2012 relate to the transfer of assets from Tier 1 to Tier 2, the treatment of assets pledged for risk management purposes, and the clarification of loss absorbency criteria. In addition, minor amendments were made to the Insurance (Group Supervision) Rules 2011. The BMA also amended the Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011 to include new schedules providing for the underlying assets of an insurance group’s funds to be held by ceding reinsurers in segregated accounts or trusts.


The BMA issued a Guidance Note on the ‘Role of the Approved Auditor’. The Guidance Note addresses recent updates to the Insurance Act 1978 and the BMA’s supervisory review procedures, including a requirement for written notice from the approved auditor of matters likely to be of material significance relevant to the BMA’s supervision of the insurer. Another change requires that a designated insurer must ensure that the group for which it is a member appoints an auditor approved by the BMA to audit the financial statements of the group.


Investment Funds


The Investment Funds Amendment Act 2013 introduced significant changes to Bermuda’s Investment Funds Act 2006, with a view to enhancing the regulatory framework for the formation and management of investment funds in Bermuda.


The amendments introduced two new ‘fast-track’ categories of funds, Class A Exempt Funds and Class B Exempt Funds. The new Class A Exempt Fund category guarantees immediate registration for funds managed by qualified investment managers, who limit the offering of the fund’s securities to ‘qualified participants’ only and who are regulated by a recognised securities regulator in the fund manager’s home jurisdiction, or have group assets under management of at least US$100 million. Class B Exempt Funds are similar, although they are designed for use by fund managers who do not necessarily meet the qualification criteria, and may take up to 10 days for registration and approval.


In the context of the EU’s Alternative Investment Fund Managers Directive (AIFMD), the BMA announced on 19 July 2013 that it had entered into co-operation arrangements with securities regulators from 26 EU member states, meaning that Bermuda funds can continue to be marketed to professional investors in the EU under national private placement regimes. The co-operation agreements are a key element in effective supervision of non-EU alternative investment funds managers under AIFMD, and they are a pre-condition in allowing Bermuda funds and fund managers access to EU markets.




The BMA issued capital guidance to Bermuda’s banks in September 2013. The guidance set capital levels for each bank based on individual factors such as its risk profile and business strategy, as well as operating characteristics from the Capital Assessment and Risk Profile (CARP) self-assessment that the institutions are required to conduct annually. Bermuda Prospectus Filing Requirements


The Companies Amendment Act 2013 introduced changes to the Companies Act 1981, which now mean that Bermuda companies listed on appointed foreign stock exchanges (including, for example, the Hong Stock Exchange, the New York Stock Exchange, and NASDAQ) no longer need to file prospectuses in Bermuda (whether or not the rules of the stock exchange require publication and filing of a prospectus).  Provided that a listed Bermuda company complies with the requirements of the exchange on which its shares are listed, it no longer has to address Bermuda’s local prospectus requirements.


The Bermuda Stock Exchange

For the Bermuda Stock Exchange, 2013 was an important year, with significant momentum in the listing of ILS products. The total market capitalisation of the BSX as at 31 December 2013 (excluding collective investment vehicle listings) stood at over US$428 billion. The strong market capitalisation was due, in part, to a high demand for alternative risk transfer and cost-efficient (re) insurance capacity through publicly listed ILS products. There were 81 new securities listings in 2013, including 42 ILS products with a capitalization value of US$4.617 billion, resulting in a total of 665 listed securities. The 2013 issuance trend supports Bermuda’s claim to be one of the world’s premier jurisdictions for the creation, listing and servicing of ILS.


International Tax Information Exchange and FATCA


Bermuda’s government made considerable efforts in 2013 to implement Tax Information Exchange Agreements with numerous foreign governments, having signed 41 bilateral TIEAs to date, with more under active negotiation. Bermuda also joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and having decided to implement FATCA Model 2 Intergovernmental Agreements with the USA and the UK, the Bermuda government signed the Intergovernmental Agreement with the USA on 19 December 2013.


On 12 December 2013, the Bermuda government introduced significant procedural amendments to the local enabling TIEA legislation, by the USA–Bermuda Tax Convention Amendment Act 2013 and the International Cooperation (Tax Information Exchange Agreements) Amendment Act 2013, with a view to restricting the scope for expensive and time-consuming judicial review challenges against tax information production orders. These legislative amendments have allowed Bermuda’s government to resolve some concerns expressed by the French government and the OECD as to the effectiveness of the tax information exchange process. 


Incentives for Job Makers and Work Permits


The Incentives for Job Makers Act 2011 came into force in 2012, and introduced significant changes to the Economic Development Act 1968 and the Bermuda Immigration and Protection Act 1956, designed to make it more attractive for international businesses to locate senior executives in Bermuda. Further amendments were made by the Incentives for Job Makers Act 2013, with the effect that companies employing an appropriate number of Bermudian staff may now secure work permit exemptions for senior executives, who may, in turn, become eligible for permanent residency. The new OBA government also revoked the previous government’s term limit policy.

If 2013 is anything to go by, Bermuda’s government, regulators, and financial sector businesses have an interesting and busy year ahead in 2014. Bermuda’s national motto seems just as relevant as ever in this context: “Quo Fata Ferunt”, or “where the fates carry us”.