10 September 2021ArticleAnalysis

A suite of options for owners

Bermuda has long been a leading jurisdiction for captive formations and at the forefront of innovation in the re/insurance space. Building on this reputation for innovation, options have recently increased for captive owners looking to set up risk mitigation structures in Bermuda.A Bermuda captive may be licensed in any of the non-commercial classes under the Bermuda Insurance Act 1978 (as amended and its related rules and regulations under the Insurance Act), including Classes 1, 2 and 3 for general business and Classes A and B for long-term business.This article provides a refresher on the now well-known existing segregated account company (SAC) structure and introduces Bermuda’s newest legislative option, incorporated segregated account companies (ISACs), both of which may be utilised by non-commercial insurers.An evolution
Segregated account structures have existed in Bermuda since the 1990s, when Bermuda enacted private acts of Parliament to enable insurance companies to operate segregated accounts. Private acts are still in use (mostly in the life space) but have been surpassed by segregated accounts companies, which were introduced in their current form with the Segregated Accounts Companies Act 2000, as amended (the SAC Act).This permits the registration of an insurance company as a segregated accounts company (SAC) and sets out the rules governing the operation of segregated accounts by SACs. New insurers may register under the SAC Act in conjunction with their initial application to the Bermuda Monetary Authority (BMA), and existing insurers can register as a SAC with permission of the BMA.An insurer registered as a SAC must still comply with the provisions of the Bermuda Insurance Act and the Bermuda Companies Act 1981, as amended (the Companies Act). Of note, the relevant segregated ‘account’ is not a separate legal entity. In essence, the segregated account is instead a record maintained by the SAC, detailing transactions relating to the assets and liabilities segregated from other assets and liabilities of the SAC, including other segregated accounts and the general account.The most significant aspect of segregated accounts is that any asset or liability linked to that account is an asset or liability only of that account and not of a company’s general account or its other segregated accounts.The assets of a segregated account are, consequently, fully insulated from any claims of the general creditors or the creditors of other segregated accounts. This position has been confirmed by the Bermuda Supreme Court (in BNY AIS Nominees & Gottex ABL Cayman v New Stream Capital Fund [2010] Bda LR34 [known as the Gottex decision]) and has not been appealed.

“Considerable interest is being shown in the ISAC structure.”

Kim Willey, ASW Law

Bermuda SACs—a trusted option
SACs provide an option for non-commercial insurers wanting to separate portfolios of risk. For example, if a captive writes a portion of unrelated risk, i.e. risk not connected with its parent company, it may wish to place such risk in a separate segregated account. Additionally, there may be advantages within related party risk to segregating separate insurance programmes. As a caution, if risks are placed in a segregated account, it is possible that the BMA may require the insurance programme placed in the segregated account be fully collateralised to policy limits.If a SAC is required to be fully collateralised, this structure may not be suitable for insurers looking to rely on the lower capital requirements applicable to non-commercial insurers. Capitalisation and classification should be discussed with the BMA early in the process.SAC structures are also a key feature of the Bermuda “rent-a-captive” market. In this model, rather than setting up a standalone captive, captive owners “rent” a segregated account from a licensed SAC (usually owned and operated by a Bermuda insurance management group) and place business in such segregated account.In this structure, the captive owner provides capital to a segregated account of the rent-a-captive SAC via a subscription for preference shares possibly with a share premium or surplus contribution, or a participation agreement linked to the segregated account.As the segregated account is not a separate legal entity, all actions in respect of the segregated account are taken by the board of directors and officers of the SAC, the SAC holds the insurance licence which covers all segregated accounts, and any business of the segregated account may only be transferred via a novation or commutation of such business.See below for an illustration of a typical SAC structure.

Bermuda ISACs—a new option
The Incorporated Segregated Accounts Companies Act 2019 (the ISAC Act) became operative on 15 January 2020. The ISAC Act exists as stand-alone legislation and complements the existing SAC Act.While the Bermuda courts have considered the SAC structure and upheld the statutory segregation of accounts established by the SAC Act, the statutory divisions between accounts do not create separate legal entities. The ISAC Act was accordingly introduced to create a regime for the registration of incorporated segregated accounts companies (ISACs).The ISAC is a hybrid of the existing SAC structure and a conventional company with limited liability.Under the ISAC Act, separate legal personality at an incorporated segregated account (ISA) level is introduced, allowing ISACs and ISAs to enter into binding contractual obligations, on the basis that such ISAs are themselves companies within the meaning of the Companies Act.See below for an illustration of an example of an ISAC structure.

Key features of ISACs are as follows:

  • Constitutional documents: The ISAC and each ISA have separate and distinct constitutional documents (e.g. Memorandum of Association and Bye-laws) allowing complex binding commercial arrangements to be created by each separate ISA.
  • Directors and officers: The ISAC and each ISA have a separate board of directors and officers. There may be synergies in utilising the same individuals, but variations are possible depending on commercial objectives. For licensed insurers, the BMA expects there will be at least one common director on each of the ISAC/ISA boards.
  • Ownership: The ISAs may be owned by common and preference shares issued in the ISA or by a participation agreement directly with the ISA owners. To preserve the ISAC structure, it is generally expected that the ISAC will need to own common shares in each ISA (e.g. similar to a parent/subsidiary relationship).
  • Mergers and amalgamations, conversion, and transfers: As each is a separate legal entity, an ISAC may merge or amalgamate with another ISAC, and an ISA may merge or amalgamate with another ISA of the same ISAC. Unlike with segregated accounts, an ISA may apply the Registrar of Companies to be registered as a company, meaning that it would then be able to undertake any actions permissible to a company, including mergers or amalgamations outside of the ISAC or discontinuances to other jurisdictions. ISAs may also be transferred between ISACs (with any necessary BMA approvals). Each of these options provides additional flexibility in terms of future transactions by ISAs which is not as readily available to segregated accounts.
  • ISAC representative: Each ISAC is required to appoint an incorporated segregated account representative in Bermuda.
  • Financial statements: ISACs are required to prepare financial statements in respect of the ISAC and each ISA. It is possible to appoint separate auditors for different ISAs within the ISAC.
  • Registered charges: In a SAC structure, charges may only be registered against the SAC, and not a specific segregated account. With an ISAC, charges may be registered against the ISAC or an ISA. This allows for greater precision in lending arrangements. Liquidation: The appointment of a liquidator in respect of the ISAC does not affect the position of the ISAs, and ISACs are not to be wound up until provision is made for each ISA. A wind-up of any ISA may occur without impacting other ISAs in the ISAC structure.

Companies engaging in insurance business are permitted to use ISACs. To set up an ISAC, an application must be made to the BMA in a similar manner to setting up a traditional insurer. However, in addition to the application for the ISAC, the initial BMA application must include an application with a separate business plan and supporting documentation for at least one initial ISA.Any future ISAs will need to submit a separate application to the BMA for an insurance licence. The ISAC and each ISA must have its own insurance licence, and the conditions of such licenses may vary per legal entity. To date, only two ISACs have been licensed as insurers by the BMA. However, considerable interest is being shown in the ISAC structure. The BMA has provided guidance on ISAC structures and allowed for applicants to apply for significantly reduced ISA licensing fees depending on the nature of the ISAC insurance program.In conclusion, there are undoubtedly additional costs for ISAC structures as each ISA is a separate legal entity requiring its own governance structure, financial statements and insurance licence. However, there are considerable synergies in the form of reduced BMA fees and service provider efficiencies, which may substantially offset these additional costs.Standalone non-commercial insurance licences and the well tested “rent-a-captive” SAC structure remain viable options. However, captive owners now have the ISAC in the suite of possible Bermuda structures to meet their needs.Kim Willey is a partner (co