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Bermuda remains the domicile of choice for many captive owners. Neil Horner, Federico Candiolo and Christa Schweizer from ASW Law explore the many reasons the Island is fast becoming a favourite for Latin American captives.
Since the advent of the modern day captive concept in Bermuda in the 1960s, the captive market has experienced significant growth and maturity in most developed economies (in particular, the US and Europe). With more than 5,000 captives operational in various jurisdictions, many businesses have benefited from the captive structure which, in its purest form, is a wholly-owned subsidiary of a large business that insures or reinsures the risks associated with the operations of its corporate parent.
Bermuda’s reputation as the leading captive and rent-a-captive market is well known and Bermuda remains the domicile of choice for many businesses seeking self-insurance through a captive product. This is particularly so in the US and Europe where captives are a tried and tested form of alternative risk management and where Bermuda captives have been recognised and highly regarded over the last four decades.
In recent years, some of Latin America’s most successful economies have started to explore alternative risk management products such as captives. Various explanations for this development can be offered, one of which is that large multinational corporates with headquarters in Latin America, the so-called ‘multilatinas’, have recently expanded operations in different countries in the region as well as globally.
As a result, these multilatinas are now experiencing more economic growth, which has prompted the need for more sophisticated risk management options, particularly for those large corporates that compete in the international arena against more established competitors that have reaped the benefits of the captive product for decades. It has also been suggested that high premiums charged by commercial insurers at the industry standard as well as inadequate insurance coverage for unconventional risks have made the formation of captives more appealing.
Bermuda in particular has experienced a rapid growth of captive incorporations by Latin American companies in recent years. The leadership of Bermuda as a jurisdiction for captive formation within Latin America is the result of various factors, some of which are highlighted below.
As the leading captive domicile, Bermuda prides itself on the continuous development of pragmatic yet responsible legislation and regulation for the captive industry. The Bermuda Monetary Authority (BMA) is committed to advancing a regulatory framework that is not only sophisticated but is also practical, where licensees and service providers alike can expect regulation and supervision to be prudently and adequately calibrated on a risk-based approach.
Bermuda’s progressive insurance legislation, which consists of the Insurance Act 1978 and its amendments and related regulations uses a risk-based approach to regulating by classifying Bermuda general business re/insurers into six separate categories (class 1, class 2, class 3, class 3a, class 3b and class 4) by the type and volume of risks they insure.
They range from class 4s and class 3Bs reinsurance carriers at the most highly regulated end of the spectrum, to the simplest class 1 single parent group captive at the other end of the spectrum.
Consistent with this risk-based approach to regulation, the BMA has also developed the Insurance Code of Conduct pursuant to its authority under the Insurance Act. The Code establishes the duties, requirements and standards that re/insurers registered under the Insurance Act must comply with. Understanding that each insurer conducts its business differently and that a ‘one size fits all’ approach is not practical, the BMA applies the Code proportionately taking into consideration the specific nature, scale and complexity of an entity’s operations.
Bermuda also pioneered the concept of segregated account companies with Private Act legislation and, in 2000, introduced one of the first pieces of public segregated accounts legislation through the enactment of the Segregated Accounts Companies Act 2000 (SAC Act). This is a particularly attractive structure for smaller companies for whom the cost of establishing a standalone captive may not be initially warranted. In the context of rent-a-captive structures, participants may agree contractually to keep separate the gains and losses of each programme from the others.
In order to achieve statutory insulation, and legally to segregate each participant’s programme from the programmes of other participants so that the assets of one programme participant are legally segregated from the liabilities of other programme participants, it is necessary to register under the SAC Act.
We are pleased to report that Bermuda’s SAC Act has now been successfully stress-tested by the Commercial Court. In BNY AIS Nominees Limited, et al v New Stream Capital Fund Limited (the Gottex case), the key principle of segregation between the different accounts was upheld by the Bermuda Commercial Court.
In addition, the BMA has embarked on a multi-year regulatory change programme seeking equivalence as a ‘third country’ for Solvency II purposes. Solvency II is a fundamental review of the European Union’s (EU) capital adequacy regime aiming to provide revised capital requirements and risk management standards for re/insurance providers in the EU. Recognising the unique nature of the captive insurance regime, the BMA has confirmed that Bermuda will not apply a Solvency II-type regime to its captive sector.
For the last decade, Bermuda has consistently been listed within the top-ranking jurisdictions on tax transparency issues by the US departments of Justice and State and the US Treasury. Bermuda is also fully compliant with US and EU anti-money laundering and anti-terrorist financing requirements, and does not have bank secrecy laws.
"One key advantage of establishing a captive in Bermuda is the access such incorporation provides to the highly developed Bermuda reinsurance market. Bermuda provides a ‘one-stop shop’"
In addition, the Financial Stability Board (FSB) recognised Bermuda in December 2013 as a jurisdiction having sufficiently strong adherence to internationally agreed information exchange and cooperation standards in the areas of banking, insurance and securities regulation. This endorsement of the FSB was in response to a call by the G20 Leaders at their April 2009 summit in London for the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions.
Bermuda was among the first offshore jurisdictions to achieve ‘whitelist’ status with the Organization for Economic Cooperation and Development (OECD) on the basis that it had substantially implemented internationally agreed tax standards and it is a leader on tax transparency issues with the OECD, the Financial Action Task Force and G20 nations.
In Colombia, a decree issued by the Colombian Government (decree no. 1966) on October 7, 2014 confirms that Bermuda, once again, remains a whitelisted jurisdiction for Colombian tax purposes. The Colombian government reassesses the list of non-cooperative or ‘blacklisted’ jurisdictions on a yearly basis and Bermuda is listed among the whitelisted, or cooperative, jurisdictions as in previous years. The continued recognition of Bermuda by the Colombian government has continued, and will continue to strengthen, Bermuda’s leadership of the captive formation space for Colombia-based multilatinas.
The number of tax information exchange agreements (TIEAs—bilateral information exchange agreements based on the model prepared by the OECD’s Global Forum Working Group on Effective Exchange of Information) that Bermuda has signed with various countries has also gained Bermuda international recognition.
To date, Bermuda has signed TIEAs with over 40 countries, including Argentina, Brazil and Mexico. In addition, being a member state of the OECD Convention on Mutual Administrative Assistance in Tax Matters extends Bermuda’s commitment to all G20 countries, all the BRICS (Brazil, Russia, India, China and South Africa), and almost all OECD countries including all major financial centres.
The Bermuda advantage
In addition to its captive sector, Bermuda is home to the third largest reinsurance market in the world. Bermuda carriers wrote approximately $74 billion in global premium in 2014. Bermuda reinsurers represented 97 percent of gross premium written by companies traded on the New York or London stock exchanges (86 percent of premium written by US Securities and Exchange Commission registrants).
Bermuda carriers paid nearly 30 percent of the insured losses from 2005 hurricanes Katrina, Rita and Wilma and, according to the Association of Bermuda Insurers and Reinsurers, the sector employs 1,800 people in Bermuda, with 150 actuaries residing and working on the Island.
Bermuda has a strong reputation as a world-class centre of international commerce and its stable, growing economy and tax transparency efforts make Bermuda a popular choice for setting up businesses in various industries.
The depth of knowledge and experience in the Bermuda insurance and reinsurance market in particular, makes Bermuda a desirable jurisdiction for captive formations. One key advantage of establishing a captive in Bermuda is the access such incorporation provides to the highly developed Bermuda reinsurance market. Bermuda provides a ‘one-stop shop’, as captives have both excellent reinsurance and retrocessional support. Consequently, having both insurance and reinsurance in Bermuda would mean supervision by the same regulator (ie, the BMA), which makes a company’s compliance requirements more straightforward and streamlined.
A Bermuda captive set up as an ‘exempted’ company (a company that is exempted from the requirements imposed on a local company by the Bermuda Companies Act 1981) is issued a Certificate of Tax Exemption by the Minister of Finance, which ensures that the captive is not subject to any Bermuda income or profits tax (other than annual government fees) until 2035.
The growth of Bermuda captives in Latin America demonstrates the strength of Bermuda’s captive brand and its appeal in regions that are still relatively new players in the international insurance market. Through effective legislation, innovation and tax transparency, Bermuda has proved time and again that its title as market leader is well deserved and the increase in captive formations in emerging markets such as Latin America further solidifies this position.
Neil Horner is head of corporate at ASW Law. He can be contacted at: email@example.com
Federico Candiolo is corporate counsel at ASW Law. He can be contacted at: firstname.lastname@example.org
Christa Schweizer is a corporate associate at ASW Law. She can be contacted at: email@example.com
ASW Law, Bermuda, ILS, BMA, Neil Horner, Federico Candiolo, Christa Schweizer, Latin America