Why Bermuda?

Second to none

For Scott Reynolds, president of the Bermuda Captive Owners Association and president and chief executive officer of American Hardware & Lumber Insurance, Bermuda’s strongest selling point is its sensible regulation. He maintains that the insurance regulatory perspective and service provider perspective on the Island is second to none.

“Regulation on Bermuda is not like a snowball going downhill which tends to happen in large states in the US and in European countries where regulation takes on an ever-increasing scope,” Reynolds says. “What’s truly important is making sure the regulatory environment is going to identify weaknesses in a carrier’s financial condition that might threaten the policyholder, and Bermuda is very good at doing that.”

When issues arise where there could be an increased focus on financial reporting requirements and solvency requirements, such as Solvency II and Sarbanes-Oxley compliance, “Bermuda doesn’t sit on its hands, it reacts in a sensible way to determine what, if any, changes need to be made,” says Reynolds.

Over the past year-and-a-half, the Bermuda Monetary Authority (BMA) has also had to contend with the increasingly hardening market. But, rather than refusing to change, the regulator has been “flexible with captives adding retention and limits”, adds Richmond.

At the same time, the COVID-19 pandemic upended traditional office-based working, another state of affairs the BMA adapted to quickly and efficiently. Reynolds and Richmond both praise the BMA and service providers on the Island for their flexibility, with Richmond noting that: “Bermuda pivoted extremely well due to the sophisticated nature of the players involved in the industry.”

An innovative approach

The regulator is well known for its innovation. In the past few years, the BMA has launched two innovation tracks and issued a notice clarifying that Bermudian re/insurers can work with cannabis companies (provided the business doesn’t constitute criminal conduct in the jurisdiction in which the business takes place).

The BMA’s parallel innovation tracks consist of an insurance regulatory sandbox and an innovation hub, both initially targeted at insurtech companies. But it’s not just the regulator that is taking an innovative approach.

“Bermuda is renowned for its progressive approach to re/insurance, which is why it is well suited to captives. This culture also comes through when designing reinsurance covers for captives,” says Mark Zammit, head of analytics at Miller.

He adds that Bermudian carriers are often keen to work with captive clients to design cover that “suits the needs of the captive rather than shoe-horn a traditional cover where it may not be suitable”.

“Captives buying reinsurance can keep the cover simple in the formative years, and then build more intricate covers with reinsurers over time to ensure they remain fit for purpose,” Zammit adds. Examples of this include experience accounts, cross-class aggregate covers and parametric products.

He summarises: “A trusted reinsurance broker can advise its captive insurance clients on the suitability of these and secure capacity at a competitive price.”

The right address

Bermuda’s small size provides a further benefit to those looking to establish or grow their captive on the Island.

“You won’t find the concentration of insurance expertise that exists in Hamilton anywhere else in the world. It’s very impressive if you’re doing business in Bermuda—there are skilled auditors, actuaries, underwriters, attorneys and more, all within a short walk,” explains Reynolds.

Zammit notes that Bermuda is one of the few regions in the world where captives and commercial reinsurance companies are within a stone’s throw of each another.

“This can be extremely advantageous: when Bermuda-based carriers are on the captive’s reinsurance panel it is more conducive to tying in reinsurer meetings on the Island with internal captive meetings,” he says.

According to Zammit, the global shift towards a more virtual way of working creates an opportunity for captive clients to set themselves apart from their peers by building strong working relationships with their reinsurers.

“Building in time to have face-to-face meetings between the risk manager, reinsurance broker and reinsurers should help create these relationships quickly and effectively,” he adds.

“Choosing Bermuda as a domicile allows captive owners to access all the benefits of Bermuda as a captive domicile, while not closing off the ability to obtain reinsurance capacity from outside Bermuda,” he says.

“Choosing a captive domicile can be a difficult exercise, as domiciles have different advantages. However, the good news is that while Bermuda reinsurers are known for their innovative approach in supporting captives, good captive reinsurance brokers will seek reinsurance capacity for the captive from carriers around the world.”

Standing up to states

As US states increase their efforts to attract captives, Bermuda may have a battle on its hands to retain existing captives and lure new formations to its shores.

“Look at DC, Vermont, Montana, Arizona, and North Carolina—they have all implemented regulations specifically to attract captives,” says Reynolds. “But the thing that Bermuda has, that I don’t think the US states have, is a single purpose: to have smart regulation which supports an attractive environment.”

In the US, unlike Bermuda, insurance commissioners are elected, he notes. They may not have a depth of knowledge on re/insurance, and an incoming commissioner may have a very different standpoint from the outgoing one.

“You can have someone elected who has the polar opposite view of the captive insurance marketplace. For example, South Carolina was trying to attract captives and doing very well. A new commissioner took office and things changed—captives had to find a new place to go,” Reynolds cautions.

Richmond adds: “There’s always been a difference between creating your captive onshore versus doing it offshore. People think you create your captive offshore for tax reasons, but that’s not the case. You usually create offshore due to the regulatory framework that’s in place and how well the offshore structure fits into a company’s global risk framework.

“US domiciles are catching up and putting stronger regulations in place but Bermuda is still very much the leader in this space.”

While Richmond is unsure whether there’s a concerted effort by onshore domiciles to take business from offshore ones, Reynolds believes there may be a change of mindset at the parent company level, with management perhaps being more comfortable with having a captive onshore.

He is quick to note, however, that while the numbers for Bermuda-based captives have fallen in 2020 (a total of 680 captive insurers, down marginally from 2019), the majority of this decrease was driven by run-off, rather than captives making the move onshore.

“We are the longest-running captive jurisdiction, and it’s natural that you will see a smaller bell curve at this stage of the life cycle,” Richmond adds.

Although numbers may have fallen in terms of formations and existing captives, captive insurer gross premiums written held steady at approximately $40 billion in 2020. And, despite disruptions throughout the year, 12 new captives were registered in 2020, bringing the total number of new re/insurance entities registered last year to 72.

Steady growth and formations clearly demonstrate that Bermuda is a top destination for captives. Despite the uncertainty fuelled by the COVID-19 pandemic and hardening market conditions, Bermuda has stayed true to itself by focusing on true innovation and progressive regulation and building up its base of talent and expertise.

Richmond concludes: “There’s always going to be competition from other jurisdictions and we’re certainly seeing that in the captives numbers throughout the year. But Bermuda still has one of the strongest and best regulatory frameworks to equip these captives, making sure they will stand the test of time and stay resilient in the future.”