9 September 2022ArticleAnalysis

A proud record of growth

Bermuda may be one of the UK’s oldest colonies, but its history as a financial centre, still less a key location for the global captive insurance market, is a relatively new one.

Discovered by Spanish explorers in 1505 and named after Juan de Bermúdez, the Island was first permanently settled by English colonists in 1612, having previously been largely unexplored and known for its reefs and shipwrecks.

Bermuda’s economic history was initially tied to trade, with Great Britain and the first American colonies and later the US after the American Revolution. A key part of the British Royal Navy’s chain of Royal Dockyards and naval bases around the world, Bermuda was regarded as a strategically vital location for many years.

After World War 2 however, changes crept in as the economy started to shift more towards tourism and finance, with various governments on Bermuda seeing the benefits of opening up the Island as an offshore financial centre.

This brought the opening first wave of insurance companies—and of course the first captive insurers.

The term “captive” was coined in the 1950s by Fred Reiss, known as the father of captive insurance, when he formed American Risk Management in 1958. At that time US regulations made it prohibitively expensive to form and operate captives in the US. As a direct result, hoping to exploit a gap in the market, in 1962 Bermuda assisted Reiss in forming what is believed to be the first modern-day captive.

A global centre

By the end of the 1960s, there were approximately 100 captive insurance companies. Bermuda was the clear leading domicile and it and the Cayman Islands emerged as global financial centres accommodating these and other sophisticated hybrid legal vehicles.

In 1969 the Bermuda Monetary Authority (BMA) was established by statute as the government of Bermuda moved to strengthen its position as an offshore financial centre. The BMA’s role has evolved over the years to meet changing needs in the financial services sector and today it supervises, regulates and inspects financial institutions operating in the jurisdiction.

By 1978, Bermuda became the first country to formalise the captive insurance industry with comprehensive legislation and standardise licensing and oversight procedures. The Cayman Islands immediately followed and wrote captive insurance legislation targeting the healthcare industry.

Bermuda and the Cayman Islands have pursued similar paths, both seeking to develop themselves as offshore financial centres, trying to attract captives and fighting off a certain sense of past notoriety due to being seen as offshore tax havens.

The Bermuda market was where the significant growth of captives began in the 1970s, with greater growth in the 1980s and 1990s due to a hard insurance market and the difficulty in obtaining traditional insurance to cover organisations’ exposure to liability claims.

A wide range of companies, not-for-profit organisations and government agencies worldwide now rely on captives as part of their programmes for managing risk. Emerging risks that are difficult to insure within traditional insurance markets have acted as another driving force behind the growth in captive insurance. A captive can include risks that are generally excluded in traditional insurance policies.

Bermuda is now one of the world’s largest insurance and reinsurance markets and is one of only two non-EU domiciles whose regulatory regime for commercial insurers has been recognised as fully equivalent with Solvency II by reference to reinsurance, group supervision and solvency capital.

In addition, Bermuda was granted Reciprocal Jurisdiction status from January 1, 2020 by the National Association of Insurance Commissioners in the US, making reinsurance provided by Bermuda commercial insurers eligible for regulatory recognition in the US without the need to provide collateral.

“A wide range of companies, not-for-profit organisations and government agencies worldwide now rely on captives.”

New departures

Bermuda has a history of innovation in terms of new areas of captive insurance, with cannabis-related captives being an area of particular interest.

The Island has a clear advantage as a domicile for cannabis captives because of the clarity of the position of the Bermuda Monetary Authority (BMA), according to panellists speaking in the Bermuda Captive Conference’s Cannabis and Captives session in September 2020.

Kim Willey, a senior corporate counsel at ASW Law, said the BMA is unique among regulators in terms of the clarity it had provided re/insurers around working with cannabis companies.

In November 2019 the BMA confirmed that Bermudian re/insurers could work with cannabis companies as long as the business does not constitute criminal conduct at the federal level in the jurisdiction in which the business takes place. This threw the door open to working with Canadian cannabis companies, although working with other countries—particularly the US—remains problematic, Willey noted.

The recent hard market has been particularly challenging for cannabis companies, which commercial carriers were already nervous about working with for legal, operational and reputational reasons.

Jonathan Barnes, manager, insurance at KPMG in Bermuda, noted that insurers have found it particularly challenging working with cannabis companies because of the lack of data around the frequency and severity of losses in that market. This has left cannabis companies with a problem managing the risks any businesses face, as well as those that are unique to that industry.

Barnes noted that cannabis companies that establish a captive will be in a stronger position to negotiate with commercial carriers in coming years because they will have built up a track record on claims.

“In five years insurers will be more comfortable with cannabis risk,” he predicted. “Using a captive now allows companies to get ahead of that.”

Cannabis companies have a broad range of insurance needs, including D&O, property, liability, product recall, intellectual property and crop insurance, Barnes noted. Captives can help provide this cover, but commercial insurers can’t offer capacity or prices that are sustainable.

Bermuda has also been looking into areas such as blockchain and cryptocurrencies, although the latter have undergone substantial price fluctuations in recent months.