The Impact of FATCA on Bermuda’s (Re)Insurance Sector

By David J Doyle, Director, Conyers Dill & Pearman, Bermuda (01/01/2015)

For over 50 years Bermuda has been the domicile of choice for major North American and European life insurers as a base through which they have provided a wide range of offshore  traditional life insurance, investment-linked policies and numerous other life ‘products’ to insureds worldwide.


Why Bermuda?


Bermuda based companies have written and continue to write significant life insurance premium/products from a tax neutral location. Companies choose Bermuda for its sensible/proportional regulatory environment, the potential for tax mitigation and the fact that Bermuda’s economy and government offer a stable climate for companies and their policy holders.  


The Island’s regulatory authority, the Bermuda Monetary Authority (BMA), plays an important – and growing – role. In the past ten years in particular, it has grown into a sophisticated regulatory body/institution and as a result we have a regulatory framework consistent with international best practices. The BMA oversight of the market is ‘proportionality based’ and Bermuda is regarded as having a sensitive regulatory approach. That said, there will always be some ‘tension’ between a regulatory authority and the industry it seeks to regulate.


What we always need to be mindful though is that our clients came (and continue) to come here because of our sensible regulatory approach which is sometimes very different to the experience they have received in their own jurisdictions. We must be sensible and sensitive to our clients in adopting new regulations and our implementation of existing ones, as we continue to seek to pass muster with overseas regulatory authorities.   


Bermuda Laws


In the life insurance space, there are many features of Bermuda law that companies and their policy holders find attractive including, without limitation, the Bermuda Segregated Account legislation.  Bermuda was the first jurisdiction in the world to introduce statutory ‘separate’ or ‘segregated’ cells or accounts in the late 1980’s. Most offshore and indeed many “onshore” jurisdictions have now copied the concept in toto and have rolled it into their own internal laws. This structure, especially, for very large individual investment linked insurance products ensure that the assets held by a segregated account established for the policy will not legally be available to meet other liabilities of the insurance company ie assets of the segregated account may only, legally, be used to satisfy the liabilities of the life insurance policy linked to that segregated account.


Finally, Bermuda is a common law jurisdiction which adds further comfort and security to Bermuda life insurers and their policy holders. The decisions of UK Courts, whilst not automatically binding on a Bermuda court, are of the highest persuasive value and it would be extremely uncommon for a Bermuda court not to uphold established UK case law.


The UK Privy Council is Bermuda’s highest court and is based in the Royal Courts of Justice in London. Judicial Committee of the Privy Council, as it is formally known, is the final court of appeal for a number of Commonwealth countries, crown dependencies and UK overseas territories, including Bermuda.  The jurisdiction of the Privy Council originates from Norman times and at one point in the last century, it was said to be the final court of appeal for more than a quarter of the world.


The existence of this right of appeal to the Privy Council adds great quality to our jurisdiction and a sense of stability that international business not only needs but demands.


AML-CFT Regulations


Bermuda is regarded internationally as a first class commercial centre and our Legislature has adopted internationally recognized AML-CFT regulations proportional to Bermuda’s business. Bermuda is accordingly well regarded by international regulators.


In this respect, it is of interest to note that the UK’s newly established Financial Conduct Authority (FCA) has developed a list of so-called high risk jurisdictions for financial crime and numerous jurisdictions competing with Bermuda have found themselves on the FCA’s high risk list.


Bermuda was not on the list.


It has been reported that the role of the FCA is to provide information with which to assess and process applications from firms seeking to conduct regulated financial service activities in the UK. Its objectives are linked to tackling money laundering, terrorist financing, and bribery and corruption.


Bermuda’s absence from this list is significant and will in my view unquestionably lead to more life (and other) insurance being written by Bermuda carriers as clients and their advisers pay great attention to these matters.


The Bermuda Dialogue


Given the enormous importance of international business to Bermuda’s economy, there is an on-going and constant dialogue between the BMA, Ministry of Finance and all of the relevant Bermuda service providers, not only to develop new products, but also ensure that, where necessary, refinements to existing laws and policies are kept under review and legislative action taken, where appropriate.  The following will more than adequately illustrate this point. 


Life Insurance Amendment Act


The Life Insurance Amendment Act, 2014 came into force recently and has introduced two quite important changes to Bermuda’s Life Insurance Act, 1978 (Act). These changes were sought by the industry in Bermuda to clarify and confirm two important areas of the Statute.


The Act now applies to all contracts made in Bermuda (unless the parties agree that some other law shall apply) and to contracts which by their terms are expressed to be governed by Bermuda law. Also, by way of amendments to the Companies Act, 1981 and the Mortgage Registration Act 1786, it is now absolutely clear that the statutory procedures relating to assignments of life contracts, including assignments for security purposes, shall be governed exclusively by the terms of the Act and not under the Companies Act, 1981 or the Mortgage Registration Act, 1786.


These changes have been welcomed by Bermuda’s life insurance companies, especially those writing investment-linked life products (variable life and variable universal life contracts, etc.) for high-net-worth customers, particularly where the customer uses leverage to acquire such life insurance.


Policyholder Protection


Given the importance of policyholder protection to developing and sustaining an economy and in order to support consumer confidence and to be consistent with international best practices, the BMA announced in June, via a consultation paper, that it is proposing a formal policyholder protection mechanism for Bermuda’s insurance sector.


In sum, the BMA has proposed that a policyholder protection framework involving a simple priority in the payment of claims for policyholders may be the most appropriate modification of the jurisdiction’s regime.  This approach is deemed appropriate by the BMA given the relatively rare occurrence of insurer failure in Bermuda and the longer time horizon for the payment of insurance liabilities compared to other financial services firms (e.g. banks). Also the requirement to hold sufficient capital assets under Bermuda’s rules and regulations, along with detailed capital requirements and the robust system of insurance supervision in Bermuda are cited by the BMA as additional factors supporting this approach.


This matter is at its very early stages and consultation is now under way with Bermuda insurance companies and relevant service providers. The actual final agreed position and legislation, if any, is a good ways off and may be different than that articulated above but again this demonstrates that the jurisdiction is pro-active and constantly looking at ways of refining and improving its structures.   


Solvency II


In addition to what one might refer to as “primary” life insurance products, Bermuda also offers a significant market for life reinsurance structures and Solvency II has been an important subject for these large retail carriers over the past six years or so.


Bermuda has worked closely with EU regulators in terms of the Solvency II requirements.   The European Commission is expected to deliver its conclusions on third-country equivalence under Solvency II in the first half of 2015.  It is expected that Bermuda’s enhancements to its laws and regulations enacted over the past five years or so will earn it equivalence under Solvency II.


The Future?


Bermuda has a lot to be proud of in terms of what we have built up over the past five decades, but we cannot rest on our laurels; other jurisdictions are competing for the same business and we have to be ever-mindful that we must continue to provide a quality product. Clients do not tell you they are considering leaving, they just leave.


Bermuda offers the right environment, in every sense, and provided we continue to service our international business in a sensible way as I have mentioned above, we will remain an attractive, competitive domicile and the dominant ‘player’ in this area.


About the Author:


David Doyle is a director in the Bermuda office of Conyers Dill & Pearman. David joined Conyers in 1996. David's practice includes all aspects of Bermuda corporate and commercial law. He specialises in insurance and reinsurance matters, and has extensive experience in the area of Segregated Accounts Insurance Companies.