Bermuda: Insurance Sector Leading the Global Market

Bermuda has established itself as a leading international financial centre. While it has gained international prominence for its funds and trusts sector, its global dominance and claim to fame is in the area of insurance. 

Since the birth of the first captive in 1962, Bermuda’s name has become synonymous with insurance. Despite increased competition from the commercial market and other domiciles Bermuda remains the number one captive domicile of choice. As at 31 December 2007 there were 958 captives registered in Bermuda, making it the largest captive domicile in the world. Others have been attracted by the opportunities available on the island with the result that Bermuda is now one of the largest property catastrophe reinsurance centres in the world. 

Bermuda is no stranger to storms; indeed, it was discovered as a result of one. And while Hurricane Andrew in 1992 and Hurricanes Katrina, Rita, and Wilma in 2005 produced a wave of new insurers and attracted billons of capital to Bermuda’s shore, its success is not the result of happenstance. To the contrary, Bermuda’s dominance in the insurance world can be largely attributed to its sound legislative and regulatory framework, efficient regulation by the industry’s regulator, the Bermuda Monetary Authority (the ‘Authority’) and the co-operation between the public and private sector in all matters of significance to the industry. 

Over the last two years, there have been various amendments and enhancements to the legislation directly affecting Bermuda insurers and reinsurers (together referred to herein as ‘insurers’), in particular the Companies Act 1981 and the Insurance Act 1978 which will be discussed in this article. The changes to the legislation encourage the highest standards of conduct without stifling the innovation of insurers and further enable them to compete on a global platform.  

Being a market leader requires that all stakeholders assess the threats, weaknesses and opportunities of the jurisdiction. The current financial market crisis, the recent presidential elections in the US, the recent hurricanes and natural disasters, and competition from other jurisdictions are events that can impact the Bermuda market. Bermuda’s Deputy Premier and Minister of Finance recently characterised the economic crisis as the ‘perfect storm’³. This article will conclude with views of the author and others on Bermuda’s future in the midst of such a storm. 

Bermuda Company Law

Bermuda is a common law jurisdiction and its company laws are principally based on English statutes. The central piece of legislation governing all companies incorporated and/or permitted to do business in or from within Bermuda is the Companies Act 1981 (the ‘Companies Act’). Each non-Bermudian owned insurer is registered as a Bermuda exempted company, which means that it is exempted from the requirements of the Companies Act, applicable only to local companies. The Companies Act is organised in parts, with the following key parts being applicable to the operation of insurers: 

Part II – The Incorporation of Companies.

Part III – Prospectuses and Public Offers for those insurers going public.

Part IV – Share Capital Debentures and Dividends.

Part VI – The Management and Administration of a Company.

Part X – Exempted Companies. 

A comprehensive review of the Companies Act was undertaken by the Legislative Change Committee of the Bermuda International Business Association in collaboration with the Ministry of Finance in 2005/2006, to modernise it in relation to company law reform initiatives that have taken place in the UK and elsewhere. The amendments came into effect on 29 December 2006 and are regarded as the most significant changes to Bermuda company law in 50 years. 

Of note and of particular benefit to insurers are the following: 

•   Companies are now able to have unrestricted objects and the capacity and powers of a natural person.
•   Companies are permitted to acquire their own shares to be held as treasury shares. Bearer shares are still prohibited.
•   The inclusion of provisions dealing with the use of electronic records transmission of documents means that, subject to a company’s bye-laws, any requirement in the Companies Act or the bye-laws to deliver a document to any person may be met by delivery of an electronic record. Furthermore, votes at a meeting can be communicated by electronic records and Bermuda publicly-listed companies can communicate with their shareholders by posting information (proxy materials and notices) on a website.
•   Companies have the ability to act in lieu of a meeting through written resolution, such resolutions being effective when signed by the same majority as would have been required at a meeting. Previously, such written resolutions were required to be unanimous.
•   Companies are no longer required to have a common seal.
•   The provisions relating to the appointment of officers (who also had to be directors) have been revised, resulting in increased flexibility for the titles of officers of companies who may or may not be directors.
•   The scope of directors’ authority vis-à-vis the shareholders has been clarified so that directors can exercise all of the powers of the company except those powers that are required by the Companies Act or the bye-laws to be exercised by the shareholders.

Insurance Legislation and Regulation

The 2006 amendments to the Insurance Act 1978 (the ‘Act’) introduced new powers to the Authority to supervise and investigate entities licensed under the act. Following such amendments, the Authority established an internal licensing body of the Authority, namely the Assessment and Licensing Committee (‘ALC’) to consider applications made under the Act and statues to which the Authority has jurisdiction. Continuing in its efforts to ensure that the insurance industry is overseen effectively and that companies regulated under the act can compete on a global platform, the Insurance Amendment Act 2008 (‘IAA’) was enacted on 30 July 2008. 

Three major amendments were made to the act by the IAA: 

•   Enhancements to the capital and solvency regulations;
•   Reclassification of Class 3 insurers through the introduction of a Special Purpose Insurer classification; and
•   Additional preparation of financial statements.

Enhancement of Solvency and Disclosure Regulations

Prior to the enhancements introduced by the IAA, insurers were required to meet a margin of solvency, as well as minimum amounts of paid-up capital for registration.  The aforementioned was calibrated based upon the scale of an insurer’s business, with higher premiums and/or reserving levels requiring more statutory capital and surplus. This mechanism did not account for the fact that certain lines or classes of business are inherently riskier than others. 

To rectify that deficiency, the Authority has developed an enhanced capital adequacy assessment tool in consultation with industry. The Bermuda Solvency Capital Requirement Model (BSCR) will assist in the implementation of risk-based capital standards for high impact insurers. This will allow for a more risk-sensitive approach to setting solvency requirements, in line with international developments regarding capital adequacy such as Europe’s Solvency II Directive.  

The BSCR employs a standard mathematical model that can relate more accurately the risks underwritten by insurers to the capital that is dedicated to their business. Intrinsic to the framework is the application of a standard measurement format to the risk associated with an insurer’s assets, liabilities and premiums, including a formula to take account of catastrophe risk exposure.  

The BSCR is facilitated by the IAA and it is intended that the model will be utilised for year-end 2008 filings for Class 4 companies. The model will be subsequently extended to certain commercial insurers within Class 3.  

The IAA also makes provision for insurers to use their own internal models to determine regulatory capital as long as such models are approved by the Authority. The Authority after consultation with industry developed an initial survey to evaluate the extent to which internal capital models are used by Bermuda insurers and the quality of these models. The survey results are currently being reviewed and site visits to such companies are underway.  

Class 3 Reclassification and Special Purpose Insurer

The IAA effectively divided the current Class 3 insurers into three subclasses; Class 3, Class 3A and Class 3B, so as to enable the Authority to distinguish between captive and commercial Class 3 insurers as the latter can be held to a higher supervisory standard. The IAA also introduced the concept of a Special Purpose Insurer (SPI). These are entities which conduct specific insurance transactions on a fully funded basis, and the IAA will allow special purpose vehicles to be established in Bermuda in a cost-effective manner. A SPI is required to have a share capital of US$1 and its assets must equal or exceed its liabilities at all times. 

Prior to the reclassification, Class 3 was a catch-all category that encompassed a vast number of insurers from captives writing a limited amount of third party business to large, purely commercial insurers. Under the reclassification, the percentage of unrelated business is calculated on either an intended net premiums written basis, or a loss and loss expense provision basis, as follows: 

•   Class 3 insurer – writing between 20 per cent and 50 per cent unrelated (third party) business;
•   Class 3A insurer – writing more than 50 per cent unrelated business with less than US$50 million of its total net premiums written from unrelated business;
•   Class 3B insurer – writing more than 50 per cent unrelated business with US$50 million or more of its total net premiums written from unrelated business. 

The Authority’s intention is to ensure proper regulation of insurers, particularly the current commercial Class 3 insurers as they sustain a greater risk profile, while continuing to strengthen Bermuda’s position in the (re)insurance market. The Authority has recognised the possibility that a Class 3A insurer may exceed its total net premium threshold of US$50 million. As a result, the Authority may require the insurer to reclassify as a Class 3B insurer or allow for the Class 3A threshold restriction to continue to apply despite the breach. 

Additional Financial Statements

In continuation of the Authority’s risk appropriate regulation, the IAA introduced the requirement for Class 4 insurers to prepare and file annually with the Authority audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) as applied in Bermuda, Canada, the UK or the US or such other GAAP as the Authority may require. 

The statements and accompanying notes will be made publicly available by the Authority.

The Future

Speculation surrounds the continuity of the (re)insurance industry in Bermuda in light of the US presidential election. The US insurance industry relies heavily on Bermuda, which has been evident in recent catastrophes such as Hurricanes Katrina, Rita and Wilma.  

David Ezekiel, Chairman of the Association of Bermuda International Companies, whose view is shared by others within the industry, stated in June 2008: “It is clear just how much the US insurance industry relies on Bermuda and the capacity we provide and once they come down to it, and are given the numbers in terms of how much the Bermuda market took in terms of a very big piece of Katrina and Wilma and the other hurricanes and natural disasters, they will realise it is essential capacity for them and anything they do about that will damage the American consumer.”

Bermuda’s leadership position in the captive market has been challenged by the proliferation of new domiciles and with the continuing soft market, incorporation numbers have been down. While some of the newer domiciles are attracting straightforward captives, Bermuda continues to excel and focus on more complex associations or industry captives. Furthermore, Bermuda’s mantra has always been quality and not quantity, and as such it continues to focus internally on ways to ensure that it “strikes the right balance between maintaining an effective regulatory framework that meets relevant international standards and ensures high standards of behaviour, while fostering an environment that remains attractive to business and enables them to grow and develop successfully.”

And what will become of the Bermuda (re)insurance market in light of the economic crisis which has seen household institutions crumble and required the US, UK and other nations to inject billions of dollars into globally revered companies and the world’s leadings banks?  Insurance is an essential product and in many respects it is recession resistant. Bermuda’s (re)insurance industry is strong and while the island’s insurers’ investments have undoubtedly been adversely affected by the financial crisis, the majority are highly capitalised, financially solvent and despite the tumultuous stock market are securely braced to weather even this ‘perfect storm’. Previously rated ‘AAA’ by the author⁶ if Bermuda continues to be accessible, adaptable and advanced, it will retain its place as a frontrunner in the global insurance market and, just as it has done throughout its history, will be well placed to pioneer the next new trend. 

1 Alex Wright ‘Bermuda still the world’s captive domicile of choice’ The Royal Gazette (7 March 2008).2 Colleen McCarthy ‘Bermuda holds position as No.1 captive domicile’ Business Insurance (30 June 2008).3 Jonathan Kent ‘Cox: Economic turmoil is ‘perfect storm’’ The Royal Gazette (9 October 2008).4 Alex Wright and Jonathan Kent ‘How will US election result affect Bermuda business’ The Royal Gazette (19 June 2008).5 Alex Wright ‘Insurance regulation bolstered’ The Royal Gazette (11 July 2008).6 Janita K. Burke ‘Bermuda – The secret of its success in the Insurance Market’ BIBA Link (Spring 08 Issue).  http://www.biba.org/newsroom/documents/BIBA_Spring2008.pdf