Regulations steering Bermuda captives ahead of the competition
During the summer of 2017, Bermuda played host to a sailing spectacle of epic proportions – the 35th America’s Cup. The island’s azure inshore waters were slashed by the foils of the AC50 class catamarans that used hydro and aerodynamics principles to generate lift making the hulls fly more often than float.
The America’s Cup engineers and designers were not the only group in Bermuda leveraging new developments to become more competitive. Captive practitioners, the Bermuda Monetary (BMA), the Bermuda legislature and others were also hard at work. As described below, the results of the latter mean that Bermuda will continue to be a very formidable force in the captive marketplace for the foreseeable future.
The foundation from which some of the recent developments have come is the Segregated Accounts Companies Act 2000, as amended (SAC Act). The SAC Act establishes a registration regime whereby a Bermudian company may register as a segregated accounts company thereby establishing, operating and maintaining a company with segregated accounts.
Segregated account structures are often used in “rent-a-captive” structures and derivations thereof. This often takes the form of a risk financing solution in which the sponsor (such as a captive manager) establishes and licenses a captive insurance company and “rents” the core capital, licence and corporate capacity of the vehicle to programme participants, thus providing participants with the many benefits of captive risk financing without the attendant administrative and capital costs associated with a pure captive. These structures can lower the cost of establishing one’s own captive, opening this solution to smaller corporations and other entities for which ownership of a captive would otherwise be too expensive.
The segregation of assets and liabilities using segregated accounts (SACs) that are legally segregated from the other SACs makes the separation between participants in the rent-a-captive unassailable in the event of liquidation. This is the principal advantage of the segregated accounts rent-a-captive, offering “fire walls” between programme participants which should withstand the claims of third party creditors of another participant. Participants need not be concerned that the underwriting losses of an imprudent participant may bring the whole facility down.
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 bodies corporate. Incorporated segregated account legislation in the pipeline is set to do just that.
The Bermuda Government has worked with Bermuda insurance industry practitioners to produce a new option for captive structures (and other insurance, funds and general corporate applications) - legislation that compliments the SAC Act - in the form of the Incorporated Segregated Accounts Companies Act 2017 (ISAC).
ISAC structures provide a statutory and common law basis for the segregation of assets and liabilities and offer a contractual relationship between incorporated cells. A number of specific provisions have been included in the SAC Act allowing segregated accounts to transact amongst themselves and with the SAC itself. Included amongst these are provisions to protect creditors in the event that preferential or other improper transactions are entered into between segregated accounts. The adoption of separate legal personality at an incorporated segregated account (ISA) level under the ISAC, by contrast, extends the ability of ISAs, beyond that provided to SACs in the SAC Act, to enter into binding contractual obligations with one another, on the simple basis that such ISAs are themselves companies within the meaning of the Companies Act 1981, as amended. Each ISA has a separate and distinct Memorandum of Association and Bye-laws, thereby allowing complex binding commercial arrangements to be created, adding structural sophistication and an enhanced level of flexibility.
Due to the separate legal personality of each ISA, the ISAC is likely to be a considerably easier structure for which to obtain a credit rating, an attractive feature for some Bermuda captive structures.
The ISAC is scheduled to be tabled before the Bermuda House of Assembly in the present parliamentary session.
The development of the ISAC legislation is not the only notable development on the Bermuda captive scene.
The BMA has implemented forward-looking changes to the insurance legislation which have potential to positively impact innovative captive structures. Changes to the Insurance Act 1978, as amended, have established a clear path for innovative captive platforms (and other insurance operations including those in the commercial marketplace) to follow an innovation track, if it so chooses. This will involve following a slightly different licensure process: one which introduces a regulatory testing environment or “sandbox” (Sandbox).
In essence, the Sandbox will be a beta testing ground for new technologies (for example, the use of blockchain technology), where the corresponding innovative products, services or delivery mechanism can be tested and vetted by the BMA before it is fully operational.
In this manner, Bermuda can continue to attract dynamic captive start-ups and captive structures whilst ensuring that the underlying regulatory principles of transparency, fitness, propriety, proportionality and policyholder protection are not compromised.
There a host of other assets Bermuda offers in addition to the regulatory environment and new options for Bermuda captive structures under the ISAC legislation.
Bermuda currently holds two-thirds of global insurance-linked security (ILS) volume, and as such is well-situated to work with captives to develop alternative risk structures.
The island offers an advantage of being a highly rated environment with which rating agencies are very familiar e.g. More than 80 per cent of AM Best’s Bermuda-rated captives are highly rated, having a rating of A- or better.
Bermuda’s prominent reinsurance market offers an array of reinsurance options for captives looking to cede risk from around the world.
The foiling AC50s are exhilarating to watch, but doing so makes one appreciate how close the underlying developments push these vessels to their structural limits. While captives and captive structures may be less exhilarating, the recent legislative and regulatory developments in Bermuda place Bermuda on a steady yet progressive footing to steer the captive market forward for years to come.