“Captive insurers get caught in this ever-growing ‘storm’ of compliance requirements.”
John Wilsen, Beecher Carlson

A mere speck in the vastness of the Atlantic Ocean, Bermuda is a 20.5-square mile ribbon of land with pink sand beaches and the charm of an island holiday destination. However, when it comes to the global insurance industry, Bermuda continues to punch well above its weight.

Bermuda is the leading domicile for captive insurers, a distinction it has held for over half a century. With total premiums written by captives north of $40 billion and assets of around $180 billion, Bermuda is likely to continue to reign as the premier captive domicile for the foreseeable future.

Over the years, the number of domicile options available to those looking to establish their own captive has grown. US-based companies are no longer limited to the traditional offshore domiciles of Bermuda, Cayman and other Caribbean island nations, with more than 30 of the US states now offering onshore options. Despite the growing competition from onshore jurisdictions, however, the appeal and benefits of an offshore domicile such as Bermuda remain.

Added to the increased competition is the ever-changing US political, tax and compliance landscape, which domiciles such as Bermuda need to navigate if they are to continue leading the global insurance industry.

The compliance burden is an increasingly stiffer headwind for Bermuda, and all offshore domiciles. Over the past few years it has been not only US policies that have added to the compliance headache. The Organisation for Economic Co-operation and Development and the EU have also flexed their muscles, burdening offshore jurisdictions such as Bermuda with added regulatory requirements. The EU’s economic substance requirements, courtesy of the unjustified perception of Bermuda’s being a tax haven, is a recent example.

Captive insurers get caught in this ever-growing ‘storm’ of compliance requirements, despite their effective regulation by the Bermuda Monetary Authority (BMA).

The ideal domicile

Bermuda has long benefited from its proximity to the east coast of the US, being only 650 miles from the coast of North Carolina. Numerous daily flights from New York and other east coast gateway cities allow one to exchange the hustle and bustle of the Big Apple for the chirping of treefrogs in just a few hours.

As a hub for many of the world’s large commercial re/insurance companies, and with the full complement of professional service offerings required to successfully operate a captive insurance company, the many benefits of Bermuda continue to hold appeal.

Bermuda’s various insurer licence classes are designed to suit the varying needs of companies, with the BMA providing sound regulation of the financial services industry and certain of its service providers. As a globally respected regulator, the BMA continues to innovate and adapt to remain not just relevant, but on the cutting edge.

Bermuda is one of only two non-EU jurisdictions granted Solvency II equivalence, and has received approval from the US National Association of Insurance Commissioners as a qualified jurisdiction.

Over the past few years, the BMA has expanded the range of insurance classes, adding innovative insurance classes with an eye on providing sensible regulation for the ever-changing mix of insurance products on offer.

During the final quarter of 2019, the Incorporated Segregated Accounts Companies (ISAC) Act 2019 came into force, opening up additional opportunities for existing segregated account insurance structures. These structures are often used in insurance-linked securities (ILS) transactions, allowing them to offer separate legal entity status for each segregated account under the new legislation after converting to an ISAC.

There continues to be innovation in the captive insurer lines and coverages being approved. Cryptocurrency and cannabis are emerging coverages starting to find their way into captive programmes. For more traditional lines, with continued pressure on the directors’ and officers’ insurance market, Bermuda is an ideal domicile for companies in a position to use a captive to mitigate market pricing pressures.

The ongoing global COVID-19 pandemic encouraged captive owners to view their captives as versatile risk management tools that can help them meet their increased insurance needs. With primary insurers no longer willing to take on specific risks, pre-existing gaps in coverages being exposed, forced growth in retentions and increased coverage exclusions, opportunities for captive utilisation abound.

Further, the continued impact of the hard market on rates means captives are now more frequently being considered as a viable alternative to the perceived overpricing in the traditional insurance market.

Getting creative

Despite the challenges, Bermuda captives are uniquely positioned to be employed in the risk financing structures of the future. Particularly for large insureds, risk financing will become far more holistic over the next decade. The rising prices and challenges of today’s insurance market have resulted in a heightened focus on the true cost of risk management by the finance team and C-suite executives, most notably the chief financial officer (CFO), of the insured.

The CFO does not typically consider insurance on a coverage-by-coverage basis, but rather the overall cost thereof. CFOs demand more creative solutions than simply increasing the retention to keep premium at an acceptable level. Captives will become a vital, almost necessary, part of the risk financing equation for large organisations.

Risk will be bundled in a captive, an aggregate retention determined based on risk tolerance and appetite, and risk transfer purchased above this comfort zone up to a probability-driven limit. That risk transfer will likely be purchased from alternative risk transfer and reinsurance markets, and Bermuda is the global centre for these markets.

The insurance market has faced its share of challenges over the past couple of years. As a result, captives have seen a significant increase in consideration. Beyond that, the insurance market is experiencing fundamental changes that will ultimately require large and upper middle-market organisations to develop more creative risk financing strategies, including the use of a captive.

As the established global leader in the reinsurance and alternative risk markets, Bermuda is in pole position to lead the industry into the future.

John Wilsen is vice president at Beecher Carlson in Bermuda. He can be contacted at: jwilsen@beechercarlson.com

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