ROUNDTABLE: CAPTIVES
Q3: WHAT ARE THE CHALLENGES FACING THE CAPTIVES SECTOR?
“There are challenges if regulations change elsewhere in the world.”
David Gibbons
Gibbons: There are probably two factors. When you have people choosing a regulatory environment, Bermuda always has a very strong case. It’s probably the most recognised captive in surance domicile in the world, recognised by the NAIC and Solvency II equivalent. The BMA is very accessible. But there are challenges if regulations change elsewhere in the world.
The other one is around talent. A big draw for Bermuda has been the ability to source talent in a confined location. That becomes a risk when the world goes more virtual and you have the ability to pull talent from anywhere; that strength starts going away.
If you can’t have individuals come to Bermuda and visit the reinsurers, brokers, account managers, auditors, lawyers, etc, that pulls away from our draw.
I think we’re more vulnerable in this area than in the regulatory space where we have a strong footing. The remote working environment is a dynamic that we need to be careful of, and we need to ensure that people are still understanding what’s here in Bermuda that you cannot get virtually.
“Our human capital and our intellectual capital are key.”
Matt Carr
Carr: From a regulatory standpoint, we have a lot to boast about. The bifurcation of our regulatory regime for insurance is important. Some of the other pressures have always been taxation based, and we’re always watching the world’s changing landscape in the taxation realm.
Some emerging good news in Bermuda is our government engaging in discussions about global tax harmony for corporate taxation.
I would add that our human capital and our intellectual capital are key. As a Bermudian I look not only to foster local talent, and I hope all of us can continue to do that, but also to make sure that the barriers to entry are reasonable for international people who are bringing skills to Bermuda that would set us apart. That’s been a key attribute of the captives market here for going on 60-plus years.
We’re still seeing consistent interest around forming new captives from prospective captive clients, and there has been an uptick in the last 12 to 24 months, so I’m remaining optimistic.
“There is now a big incentive for US companies to form captives in the US.”
Michael Parrish
Parrish: I don’t think too much has changed, but that’s not necessarily a good thing. We see very few captives formed by US companies now, and those that do are probably here for a specific reason. I agree that the infrastructure here is second to none but there is now a big incentive for US companies to form captives in the US.
From a captive insurance perspective, the US was traditionally Bermuda’s strongest market, and that is why captive numbers are not showing the type of growth we might expect in current market conditions, but growth is still strong in other sectors and from other territories.
The other challenge, that we may not see because we live here, is the increased cost of doing business in Bermuda. That is a major challenge, and I’m afraid it compares unfavourably against the cost of setting up and running a captive in the US.
If it becomes an economic issue, then Bermuda is always going to be more expensive. And with every increasing layer of regulation that we have, with every new piece of compliance from economic substance to cybersecurity regulations, it gets more expensive.
These are all good things, and we accept that they’re necessary, but they increase the cost of doing business here. And it just means that Bermuda becomes less competitive when compared to onshore jurisdictions.
The challenge we face is how do we retain our competitive edge but still retain a compliance and regulatory culture that encourages people to come here because they don’t want to go to an unregulated environment?
They want regulation and they want to be in a domicile which has a good reputation. But the more burdensome that compliance becomes, the more the costs go up. At some point it will just become uneconomic and companies will simply go elsewhere.
“People aren’t as willing to move as they were in the past.”
Brian Quinn
Bailie: I agree. The US doesn’t impose anything like the same degree of regulatory discipline we’re forced to deal with. That does put us at a disadvantage, but we can’t make it go away. We just have to work harder, or at least improve it as best we can.
Kirwan: Europe went through this in the early 2010s with Solvency II implementation. That sort of regulatory burden can be hard to turn around. There was an exodus from a European perspective, nearly exclusively driven by regulatory creep. Some concerns were not factually true, but it became a big issue.
Bermuda has to be very careful to continue to focus on what we’re trying to achieve. Our clients ensure they have time to address the risk issues of my parents. The regulatory and compliance stuff is a necessary evil but there is a tipping point. It’s a very precarious position and we have to tread very carefully.
Bailie: The BMA remains flexible and user-friendly, which is a relief compared with dealing with some other regulators. But that doesn’t make the other compliance issues go away in Bermuda. The regulations and code of conduct are what they are.
Quinn: I would focus on attracting and training people; that’s the biggest challenge I have. My business is primarily based in Bermuda, but it’s much more international. I deal with captives in multiple domiciles, including Bermuda, but attracting talent to come here or training people here can be hard. COVID-19 has made that more difficult.
I agree that attracting people to Bermuda can be tough. People aren’t as willing to move as they were in the past because of the pandemic which has made people refocus their priorities and moving overseas is not as attractive as it once was. In addition, the cost of living in Bermuda is a deterrent.
“Some of the roles are changing right in front of our eyes.”
Paul Bailie
Carr: I’d like to share an anecdote that illustrates how responsive the BMA can be. Clients approached us about establishing a captive structure in Bermuda. I walked them through the process and they shared that they had been in touch with the BMA for a period of several weeks prior to our call.
The BMA had been a very helpful first point of contact, and while out of the ordinary from a jurisdictional onboarding standpoint, the client appreciated the direct dialogue and insight of our regulator and the candid input they had received to that point.
Our regulator is very hands-on and their door is always open.
Bailie: The challenge on attracting talent is also that we’re competing with the commercial reinsurance industry in Bermuda, which tends to have more money to throw around. But even outside of Bermuda, attracting talent isn’t that easy at the moment. There’s a lot of change going on. A lot of that may be around remote working and different approaches to work-life balance. It’s probably going to take us all some time to get used to.
I don’t think it’s restricted to Bermuda. I know this because we’re seeing some similar issues in other locations. Some of the roles are changing right in front of our eyes.
“In a fully virtual world, you cannot be anywhere and do anything.”
Séadna Kirwan
Kirwan: We have to be conscious from a tax perspective. In a fully virtual world, you cannot be anywhere and do anything because there are tax consequences for our clients.
We have to demonstrate that the main core of the business is done in Bermuda. We have to be very conscious of that when we’re trying to attract talent.
Carr: There are a host of challenges in terms of recruitment these days. It is a competitive industry. The counter argument to that is there are a lot of highly skilled professionals in Bermuda from all over the world already, and these persons help to attract other skilled professionals from those nations.
Bermuda is a very sophisticated locale and has a lot to offer international professionals from quality of work and quality of life standpoints.
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