Captives Enjoy the Bermudan Regulatory Climate

01 November 2006

It is quite a remarkable achievement that Bermuda, which occupies a mere 21 square miles in the middle of the Atlantic, has become the largest captive insurance jurisdiction and even more remarkably the second largest reinsurance centre in the world.

Rod Attride-Stirling and Neil Horner, Attride-Stirling & Woloniecki

Bermuda’s success is due to a number of reasons but a golden thread interweaving the success of the Bermudian insurance market has been and remains its facilitative but responsible regulatory environment and its stable court and political structure. Bermuda has always used a risk-based approach towards regulation of its licensed insurers and reinsurers and it is to be anticipated that this will be refined and developed in line with the increasing globalisation of insurance regulation developed in consultation with bodies such as the International Association of Insurance Regulators. 

On the regulatory front, control over all Bermudian financial services (including the insurance industry) is exercised by the Bermuda Monetary Authority (BMA). Insurance legislation continues to evolve. Following the enactment of the Insurance Amendment Act of 2004, the BMA has published some 15 guidance notes to the insurance industry. These aim to codify existing good market practices and also to clarify the scope and implementation of Bermuda’s insurance legislation as interpreted by the BMA. The guidance notes concentrate primarily on setting out the BMA’s view on the role and responsibilities of the key service providers to the insurance industry. In addition, the BMA has published a guidance note dealing with corporate governance, which recognises that a one-size-fits-all approach is unsuitable. 

The publication of the guidance notes demonstrates Bermuda’s commitment to further improve its legislative framework consistent with evolving international standards. This determination has been shown yet again by the introduction of the Insurance Amendment Act 2006, which has given the BMA enhanced powers of enforcement and investigation and imposes a requirement to notify the BMA of new or increased control of insurance companies by ‘shareholder controllers’. The BMA has the right to serve a notice of objection on new or increased controllers. 

Significant developments to Bermuda’s court system have also occurred. In particular, a specialist Commercial Court has been created comprising a group of judges with extensive experience in commercial litigation, insolvency, and insurance and reinsurance matters. The recognition of the need for specialist commercial judges and their appointment from within the ranks of the senior members of the Bermudian legal community bode well for the future. In addition, Bermuda has just introduced a comprehensive update of its procedural Supreme Court rules (including a more modern costs regime) under the leadership of new Chief Justice Richard Ground. 

 

The Class of 2005 

The emergence of the Bermuda ‘Class of 2005’ demonstrates once again that Bermuda is the jurisdiction of choice for new insurance and reinsurance carriers in the capacity crunch in the world reinsurance market that followed in the wake of the 2005 hurricane season. That new carriers decide to headquarter in Bermuda (just as they did in 2001 when the Bermuda Class of 2001 emerged after 9/11) speaks volumes about the enduring strength of the Bermudian insurance proposition and about their faith in Bermuda. 

The devastating 2005 hurricanes presented an opportunity for capital providers. They resulted in the creation of a substantial Class of 2005 Bermuda insurance carriers and represented a large part of the almost US$18bn estimated to have been raised by carriers in Bermuda in the last three months of 2005. 

A marked feature of the new start-ups was that hedge fund capital represented a significant proportion of the new money coming in to the market. A number of hedge funds took an equity position in startup companies. 

Much more significantly, however, some hedge funds became directly involved in the Bermuda reinsurance market by forming their own licensed Bermuda reinsurers primarily to write property catastrophe risk and frequently providing very high-level coverage. 

 

The Sidecars 

Another interesting feature of the Class of 2005 has been the establishment of so-called ‘sidecar’ vehicles in which hedge funds have again been the primary investors. A sidecar is, simply, a reinsurance company which reinsures one other insurance company. It has many of the attributes of a hedge fund with the reinsurance contracts equating to the underlying investments and the ceding reinsurers equating to the hedge fund managers. The sidecar’s commitment to the reinsurance transaction tends to be short term (say one year) and the sidecar will typically have the option to exit the transaction on expiry of this period. 

The vehicle is attractive for the reinsurer as it provides additional underwriting capacity and fee income without diluting shareholder’s equity participation in the reinsurance company. 

The growth of the sidecar further illustrates Bermuda’s ability to provide new products and additional capacity in response to the underlying needs of the insurance market. 

 

Conclusion 

Bermuda continues to evolve and develop to deal with its success. It is a very stable country but like all offshore jurisdictions must balance competing demands and priorities. It appears to be doing this quite nicely as the arrival of the Class of 2005 eloquently manifests more pithily than any slick promotional advertising campaign. And one suspects that the choice to come to Bermuda has nothing to do with the nice golf courses and beaches that come as an added extra, though of course this doesn’t hurt!