Bermuda Overview: The Bermuda Market
Mina Matin -
Rod Attride-Stirling
In the midst of the global financial crisis and a disillusioned business environment, the Bermuda insurance market has remained resilient.
As Thomas Moore said, “There is no way to re-enchant our lives in a disenchanted culture except by becoming renegades from that culture and planting the seeds for a new one.” It is precisely the driving force to germinate and grow new business in new and varied financial structures that has allowed the Bermuda insurance market to limit its exposures to the current global financial crisis and remain strong. Bermuda is the global leader in the captive insurance industry, home to almost 1,200 captive insurance companies who collectively wrote almost $20 billion in premiums in 2009 in a soft global market. It is also one of the world’s largest and most recognised reinsurance markets. Bermuda is home to a number of company head offices, as well as subsidiaries of global insurance and reinsurance companies. Bermuda has 13 of the world’s top 40 reinsurance companies (with two of those in the top 10). Bermuda also boasts a high-quality funds marketplace and is a centre of excellence for shipping, aircraft finance and IT.
Regulatory Infrastructure
The Bermudian legislature supports Bermuda’s credibility as an epicenter of the insurance and reinsurance industry. An insurance company set up in Bermuda is subject to the legal regulatory regime of the Companies Act 1981 (“Companies Act”) and the Insurance Act 1978 (“1978 Act”) and other associated regulations. Since the inception of the 1978 Act, Bermuda’s legislation has been amended to reflect the changing risk profile of the market and the breadth and diversity of underwriting activities conducted by Bermudian insurers and reinsurers.
Multiclass Licensing System
In 1995, the Insurance Amendment Act introduced the multiclass licensing system or risk-profile framework that is at the core of the current Bermuda regulatory system whereby a hierarchical ladder of regulation is applied depending on the size of the carrier. In summary: Class One is single parent captives with a modest share capital; Class Two is multi-owner captives which may write up to 20 per cent third-party risk unrelated to the parent/owners or their affiliates; Class Three is typically insurance companies writing solely third-party business which don’t fall within Class Four; and Class Four is highly capitalised and large-scale excess liability/property and casualty insurers and reinsurers.
Pursuant to the Insurance Amendment Act 2008, Class 3 (re)insurers have been reclassified into three separate classes, namely: (i) Class 3 insurers whose percentage of unrelated business represents more than 20 per cent (the threshold applicable to Class 2 insurers) but less than 50 per cent of unrelated business (on a net premium written basis); (ii) Class 3A insurers whose percentage of unrelated business exceeds, or is expected to exceed, 50 per cent of net premium written and/or net loss and loss expense provisions, and where the unrelated business premium does not, or is not projected to, exceed US$50 million; and (iii) Class 3B insurers whose percentage of unrelated business exceeds, or is projected to exceed, 50 per cent of net premium written and/or loss and loss expense provisions and where unrelated business premium does exceed or is expected to exceed US$50 million.
In an attempt to provide greater transparency in the financials of Class Four companies, the Insurance Amendment Act 2008 also imposed new requirements on Class Four (Re)insurers. Class Four companies must now prepare financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”) or International Financial Reporting Standards (“IFRS”) which must be audited. Additionally, the BMA may also make orders setting prudential standards for enhanced capital requirements and capital and solvency returns in relation to Class Four companies.
Alternative Risk Transfer Solutions: The Segregated Accounts Companies Act 2009 as Amended
It is fair to say that Bermuda is a global leader in alternative risk transfer and reinsurance and the legislature has devised cutting-edge insurance solutions to meet market demands. Indeed, Bermuda was the first offshore jurisdiction to pioneer the concept of protected cell legislation through the use of private Acts of Parliament.
Since 1990 Bermuda has been enacting private acts of Parliament to enable insurance companies to operate segregated accounts. Many of these have been established as “rent-a-captive” facilities, providing the participant with a legally segregated cell within the company through which to underwrite their insurance programme. Each cell is segregated from the claims of creditors of other cells and allows each participant to run its programme without sharing the underwriting risks of other participants in the rent-a-captive. In 2000, Bermuda enacted the Segregated Accounts Companies Act 2000 (amended in 2002) (“SACA 2000”) which permits a company to have legally segregated accounts by registration and sets out rules governing the operation of segregated accounts. The benefit of a segregated company/captive is to allow the company to ring-fence certain risks and assets of the company without having to incur the expenses of having to resort to trust, contractual or other structures.
Regulatory Powers of the Bermuda Monetary Authority
With the recent financial crisis highlighted by the collapse of insurance giants and the concern to guard against sharks like Madoff and Stanford in Bermuda waters, regulation of insurance companies and the need for regulators to oversee financial operations has been a prominent feature of recent Bermudian legislation.
The 1978 Act was amended in 2001 to, amongst other things, devolve responsibility over the insurance industry from the Minister of Finance to the Bermuda Monetary Authority (“BMA”) which is responsible for compliance and enforcement of the provisions of the 1978 Act. The BMA possesses broad powers of intervention where (a) the conduct of the insurer’s business is such that there is a significant risk of the insurer becoming insolvent, or (b) the insurer is in breach of the 1978 Act or of the regulations or a condition imposed on its regulation.
In 2008, the Amendment Act, enhanced the BMA’s powers to prescribe by order prudential standards in relation to (a) enhanced capital requirements and (b) capital and solvency returns, which must be complied with by registered insurers. This provides the primary legislation basis for the adoption of the Bermuda Solvency Capital Requirements (“BSCR”) (which will initially apply to Bermuda’s Class 4 reinsurers) as part of the road map towards Solvency II Equivalence (a new legislative framework which Bermuda is seeking to implement). Solvency II will govern the capital requirements of insurance companies which will have far-reaching consequences on how firms are managed. Its primary objective is to protect the interests of policyholders and beneficiaries through ensuring the financial stability of insurance and reinsurance companies.
Insurance Amendment (No. 2) Act 2010
As the globalisation of financial markets created a catalyst for the development of financial groups spanning multiple jurisdictions, the BMA has seen an increased need for regulation of not just individual insurance companies but rather insurance groups and financial conglomerates as a whole. As a result, the recently enacted Insurance Amendment Act (No. 2) 2010 which came into effect on 29 March 2010 has expanded the scope of the 1978 Act dramatically to apply not just to a sole parent company but also the whole family of its insurance group. This includes its subsidiaries and any entities in which the parent company holds a participation, or a group of companies that is based on “the establishment, contractually or otherwise, of strong and stable financial relationships among those companies.” All companies falling within the group may now be subject to regulation under the 1978 Act and a new regulatory framework has been laid down whereby the parent company will be responsible for group-wide corporate governance, effective risk management and monitoring of eligible capital for the purposes of satisfying available capital and surplus and group reporting requirements. The impact of the 2010 Amendment Act remains to be seen but it is certain that insurance companies and subsidiaries will be the subject of more transparency which must prevail in all levels of their operations.
Dispute Resolution Infrastructure
It is hardly surprising that, with a sea of underwriting capacity, and the ability of the market to underwrite substantial premiums, there will not be a spillage of unresolved claims giving rise to significant disputes between insurers and reinsurers. This is dealt with effectively by the Supreme Court of Bermuda, whose Commercial Court is both apt and well-equipped with highly experienced judges to clean up the pollution of disputes caused by toxic repercussions of the insurance market. Recent decisions have indicated that the Bermudian Courts are well aware of, and sympathetic to, the impact of the global financial crisis on companies and the need to create a regulatory environment.
The Future
Bermuda has always succeeded in striking a balance between the need to have robust regulation and the desire to have a regulatory environment that is flexible, speedy, and sensible. Bermuda pioneered the risk-based approach to regulation that the rest of the world is now turning to. In this respect, Bermuda cautiously continues to lead the way.