Bermuda: a safe harbour for innovation in the post-pandemic captives industry

As the world enters a welcome post-pandemic phase, it is natural for the insurance industry to look back at lessons learned from COVID-19 and ponder on how to better prepare for similar future events.

At the same time, the industry can look to the challenge of providing solutions in the rapidly emerging new world where the nature of insurance risks is being reshaped by advancements in technology, new standards of corporate culture based on environmental, social and corporate governance (ESG) factors, and legislative events such as the decriminalisation and legalisation of cannabis.

The current hard insurance market conditions and relative scarcity of capital means that the traditional insurance market could find it increasingly challenging to meet the new and heightened demands for insurance cover, and to do so at commercially viable rates. This brings about an opportunity for the captive industry and, specifically, Bermuda, which has a reputation as an excellent captive insurance hub, and a proven track record in attracting fresh capital and creating capacity, especially in hard insurance market cycles. Bermuda is extraordinarily positioned to help address the technology, legislative and ESG-driven insurance needs that are rapidly emerging globally.

The impact of ESG

The proliferation of underwriting exclusions and restrictions in cover in the global insurance market could potentially create fresh opportunities for Bermuda’s captive insurance industry, depending on the rationale for the exclusions or restrictions. Some large global insurers and reinsurers have recently announced that they will either exclude or restrict cover of assets and projects connected to industries such as fossil fuels, due to environmental concerns.

These companies desire to transition to carbon neutrality, which is a growing trend as pressure mounts from stakeholders motivated by social responsibility. Notwithstanding this, a Bermuda captive might be the solution to bridge the coverage gaps created, however, this solution might only be available where there are no serious ESG concerns behind the original exclusion or restriction, since ESG is also becoming a feature of the Bermuda market.

Legalised cannabis

Legislative changes have fuelled rapid growth in the cannabis industry in some of the world’s largest economies including Canada and parts of the US. Judging from past and ongoing experiences of the tobacco and asbestos industries, the cannabis industry could potentially face future product liability and health-related claims that could have a damaging financial impact in the absence of proper risk planning and financing.

Such claims may be decades in the making and, because captives are a good way of accumulating capital to deal with future loss events, the cannabis industry is already showing interest in setting up captives for this purpose, with Bermuda being looked at as a good platform for such captives.

Technology-driven insurance needs

Digital technology such as artificial intelligence (AI), blockchain, cryptocurrencies, and non-fungible token (NFTs) present new forms of insurance risk that lack adequate historical data needed for pricing. However, as demand for such cover grows, the insurance industry will eventually find solutions, and it is not inconceivable that Bermuda captives will play a role.

For example, in the cryptocurrency world, it is estimated that $150 billion has been lost due to owners losing control of their private keys and/or passwords. Cover for such losses is only now starting to become available, and Bermuda is already involved in this new insurance niche.

Another example is NFTs which are insurable assets to the extent that access to them can be lost by their owners. A conservative estimate is that the total value of NFT transactions worldwide jumped to more than $17 billion in 2021 and this strongly suggests that an addressable market exists for insuring NFTs.

Bermuda’s innovation hub & insurance regulatory sandbox

Bermuda has recognised the impact of digital technology on the insurance market and has provided a safe haven in the form of the newly created innovation hub and insurance regulatory sandbox. These are parallel systems created by the Bermuda Monetary Authority (BMA), which is the body that regulates the insurance industry in Bermuda.

The innovation hub and regulatory sandbox have been popular with companies engaged in cryptocurrency business, AI technology and proprietary software and products. The purpose of these parallel systems is to allow for the testing of insurance-related business models in a controlled, regulated environment.

Companies in the sandbox have the option to eventually “graduate” to become a fully licensed entity in Bermuda. Licensing as a IGB (general business) or a ILT (long term) class is available to sandbox companies and these licences are aimed at companies seeking to carry on general insurance business or long-term insurance business respectively in an innovative and experimental manner. The IIGB class licence is also available and is generally designed for businesses carrying on general business in an innovative manner and intending to use digital assets or cryptocurrency for their insurance business.

At the time of writing, there are 10 companies in the BMA’s sandbox and innovation hubs, two of which are listed as having “graduated”. This is proving to be an excellent way for insurance startups with innovative or experimental insurance ideas to develop their ideas and execute their business plans in a low friction environment without unnecessarily tying up much needed capital during the startup phase of the business. Underlying these systems is the requirement to adhere to an appropriate level of regulatory oversight and policyholder protection supervised by the BMA.

These new systems and classes of insurers demonstrate Bermuda’s embrace of technology and underscores the desire to stay one step ahead of other jurisdictions, while also signifying that there is room for innovation throughout the insurance industry.

Transparency and international cooperation

Bermuda continues to be a leader in tax transparency among its peers. Many Bermuda US captives have 953(d) elections and are treated as US taxpayers. Tax consideration are generally not the sole purpose for choosing Bermuda as a domicile for a captive. Bermuda successfully introduced the economic substance legislation in January 2019, aimed at reducing or eliminating the facilitation of offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in Bermuda.

A mutual evaluation report (MER) relating to the implementation of anti-money laundering and counter-terrorist financing standards in Bermuda was undertaken in January 2020 by the intergovernmental agency, the Financial Action Task Force (FATF) which is a policymaking body that develops and promotes international policies to combat money laundering and the financing of terrorism. According to that MER, Bermuda was deemed compliant or largely complaint with 39 of 40 FATF recommendations, demonstrating once again Bermuda’s commitments to the highest standards of International best practice.

In February 2022, when Russian forces invaded Ukraine, Bermuda’s sophisticated financial system quickly enforced global sanctions of Russians and Belarus, further demonstrating the strength of Bermuda’s financial infrastructure and its adherence to the highest levels of international standards.

Bermuda insurance industry is highly recognised internationally, and its EU Solvency II equivalence regime and NAIC endorsement instils additional confidence in the Island as centre of excellence for insurance.

Other factors

Even without the innovation, Bermuda’s captive insurance industry continues to stand out for some long-standing factors include speed to market, cost-effectiveness, the large insurance talent pool and low friction operations. Bermuda’s regulators understand insurance business and provide a balanced legislative framework that adequately protects policyholders while maintaining the Island’s commercial appeal.

These are some reasons Bermuda remains the leading captive domicile with over 700 captives registered, writing over $40 billion of gross premium annually. The inclusion of insurtech and innovation in Bermuda’s captives sector will not only ensure growth but will also lead the way for the global captive insurance industry.

Supporting the dynamic captive insurance industry in Bermuda is an agile workforce and a strong and versatile information technology infrastructure. There is a paradigm shift in Bermuda’s working environment mirroring evolutions in many other developed economies, where the physical office is no longer viewed as the sole place of work by employers and employees. Post-pandemic concerns, many Bermuda companies have now introduced policies allowing a hybrid home/office arrangement. This is another attestation that Bermuda is in step with global industry best practice.

Insurance is a key financial component in the operations of the world largest industries, and captives form an important part of the global insurance sector. Consequently, the traditional captive model has to adapt and modernise to keep pace with the rapid technology-driven changes and the move to digitisation and globalisation.

Bermuda’s captives industry was first to recognise the need to adjust, and is currently providing a safe harbour for experimentation, technology, and innovation in the captive insurance sector.

Captive solutions

The Ocorian team provide a full suite of administration and fiduciary services to the insurance-linked securities and captives market from our Bermuda, Cayman and BVI offices, ensuring that all structures remain compliant with applicable regulations in each jurisdiction. We add value throughout the life cycle, from incorporation and licensing, to unwinding and voluntary liquidations when the structure ends its natural life—precision and technical expertise has been the hallmark of our service offerings to this important global industry.