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9 March 2018Analysis

AIG wants to grow alongside Bermuda in the captives space

Against a backdrop of strong captive formation statistics, a robust regulatory environment and new legislation being drafted, Bermuda’s growth prospects as a captive domicile look promising in 2018.

This is according to Kathleen Bibbings, vice president and head of Bermuda captive services at AIG, who spoke to Captive International about some of the factors captive owners must consider when selecting a domicile, what makes Bermuda attractive, and how AIG is looking to grow there.

“Grand Isle is a key component of our strategy of offering one-stop shopping to clients and providing a full range of captive solutions.”

Bibbings says there are many factors prospective captive owners must consider—including whether to go onshore or offshore—that will drive the decision-making process. These include:

  • Regulator—are the regulator and the domicile well respected?
  • Regulations—are the regulations appropriate and risk-based? For example, do the regulations differentiate between a captive and a commercial insurer?
  • Costs—what are the government fees, premium taxes, income taxes?
  • Speed to market—how easy is it to form the captive in the selected domicile?
  • Professional services—is the domicile also home to advanced communications networks, and the insurance managers, attorneys and auditors needed to run the business?
  • Location—is the domicile convenient and easy to access?
  • End of life—how easy is it to shut down the captive when it no longer forms part of your risk management strategy?

Bibbings believes Bermuda scores highly in these categories, as evidenced by the 17 new captive formations on the Island in 2017 (compared to 13 in 2016).

“Bermuda is not only the largest and oldest captive domicile, it is also a major insurance centre offering one-stop shopping for all of a company’s insurance needs,” she says.

“As a self-governing British colony, Bermuda has enjoyed continuous political stability since the 1600s. In addition, Bermuda is a tax-neutral jurisdiction with no income, corporate, withholdings or capital gains taxes.”

The Bermuda Monetary Authority (BMA) reported a total of 739 active captive insurance licences on its register at December 31, 2017. Net premiums written by Bermuda captives amounted to $54.7 billion, compared with $55.3 billion year on year.

“Captive insurance is an important segment of the Bermuda economy, annually contributing an estimated $174 million and directly employing more than 550 people on the Island,” she adds.

A solid choice

From shipping and transport to energy, Bermuda’s captives represent a broad range of industries, Bibbings notes.

“While financial institutions overwhelmingly comprise the top industry by premium written (54 percent), the industry breakdown by parent company is much more diverse,” she says.

Statistics from the BMA show the top industries by parent company include financial institutions (18 percent); shipping transport and storage (14 percent); automotive, manufacturing and retail (11 percent); followed by energy, power and utilities (9 percent); healthcare (8 percent); professional services (8 percent); wholesale and retail (7 percent); administrative and support services (6 percent); and construction (4 percent).

Not only are the industries diverse, but the types of coverage are also broadening.

Bibbings says there has been increased interest in using captives for cyber, employee benefits (not subject to the US Employee Retirement Income Security Act), and medical stop loss.

“With cyber being a risk that companies and insurers are still trying to define, understand and price, a captive can be a useful tool to retain risk and also assume broader coverage not available or too expensive in the traditional risk transfer market,” she says.

“As employee benefits expenses continue to rise, searching for solutions to combat these increases has motivated companies to look for additional ways to contain their costs. A medical stop loss captive provides an alternative between the extreme of purchasing a fully insured product (high cost but low risk) and going fully self-funded (less expensive but more volatile).”

Bibbings also suggests that Bermuda is an attractive domicile to a wide cross-section of geographies.

This is supported by BMA statistics, which show that North America makes up 62 percent of the risks assumed in Bermuda, followed by Europe (25 percent); Asia-Pacific (2 percent); Central & South America and the Caribbean (2 percent); Africa and the Middle East (2 percent); and Australia and New Zealand (1 percent).

“As certain geographies develop and begin to make the transition from being purchasers of insurance to managing total risk, we have seen an increased interest in establishing captives from Latin American parent companies,” says Bibbings.

In light of the recent US tax reforms—which reduce the US corporate tax rate from 35 percent to 21 percent—Bibbings says the decrease has its benefits in Bermuda, as it is common practice for US parent companies to choose for their Bermuda captives to be treated as a domestic company for tax purposes, known as 853(d) election.

Growth opportunities

One way AIG is growing in Bermuda is through its segregated accounts company (SAC), Grand Isle SAC.

Along with AIG’s Captive Management Services group providing captive advisory and management services relating to the feasibility, structuring, formation and overall management of standalone, group and cell captives, Grand Isle offers many of the same benefits without the full operating costs of a standalone captive.

“Grand Isle is a key component of our strategy of offering one-stop shopping to clients and providing a full range of captive solutions, from feasibility studies to fronting and risk transfer support,” says Bibbings.

“Having recently strengthened our bench in Bermuda, we will continue to work closely with our colleagues in EMEA and the Americas as captive and fronting opportunities arise globally.”

Bermuda was one of the first domiciles to introduce SAC legislation, in the year 2000.

The SAC enables the legal separation of assets and liabilities through the creation of specific accounts or cells within the company, with each cell insuring the risk of a different participant.

Bermuda is in the process of strengthening this legislation, having drafted incorporated segregated accounts company (ISAC) legislation by which each account or cell within an ISAC is itself an incorporated entity with a separate legal identity and the protection of limited liability.

At the time of writing, this draft legislation is under review by the Bermuda government and the BMA and is expected to go into effect by mid-2018.

“As AIG looks to grow its business in Bermuda—and worldwide—our investments in people, processes, and technology are creating value for our clients by helping them achieve their risk, governance, and contract certainty objectives while delivering a seamless, globally consistent client experience,” Bibbings concludes.

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