9 September 2022ArticleAnalysis

The insurance lab of the world

Bermuda remains the insurance laboratory of the world—the domicile continues to thrive and attract new business and startups, including in the captives space, very much because of the innovative and forward-looking perspective of its regulator.That is the view of Nick Frost, president, and Tom McMahon, executive vice president, of Davies Captive Management, who are also bullish about their own company’s own footprint and prospects in the space. A combination of growing interest in the use of captives globally driven by the hard market and Bermuda’s innovative regulatory regime makes for a very optimistic outlook, they argue.“Bermuda has a very well-educated regulator; it’s innovative and interested in looking at new ideas, new structures,” says McMahon. “We call Bermuda the insurance laboratory of the world. It used to be the catchphrase for our conferences but it’s still valid today.“Although captives have not used it much yet, the regulatory sandbox is the best demonstration of that.”He explains that the way in which the Bermuda Monetary Authority (BMA) has been willing to update the Insurance Act to account for new classes of business also demonstrates its forward-looking mentality.“That approach has stood the test of time. We always ask captive owners why they come to Bermuda. The answer is always similar: because it’s the gold standard, which is always good to hear,” McMahon says.

“The regulator is always open to new ideas and solutions.”

Nick Frost, Davies Captive Management

Frost agrees. “The regulator is always open to new ideas and solutions. They are very independent and have very high standards. But they are open to ideas, and clients like that.”When that approach dovetails with a higher demand for captive solutions, Bermuda benefits. The hard market conditions in the wider commercial insurance markets have led to a surge in demand from companies keen to either reduce their growing spend on insurance or find a home for risks which the commercial insurance markets will not cover.It is then a case of which domicile they choose to work with. There is healthy competition between domiciles, but Bermuda is always high on the list of options.“We’re seeing a lot of interest in forming new captives and Bermuda is high on the list of options,” Frost says. “Cayman and Vermont are challenging but Bermuda has a great reputation for its good regulation. Bermuda is not just a captive insurance jurisdiction, it is an international insurance and reinsurance centre. It’s a one-stop shop, which is very helpful for bigger companies.“A lot of people that set up a captive want the whole insurance and reinsurance ecosystem in one place, so they can also access that capacity through a captive. That is an advantage. We are one of the top three reinsurance destinations in the world and that’s a good thing.“That is complemented by the captive infrastructure here in Bermuda, the expertise, the management community, the banking community. It has all stood the test of time and is still strong today. That is a big part of the attraction.”

“There is not always the fronting company at one end and there is sometimes not the reinsurance capacity at the other.”

Tom McMahon, Davies Captive Management

Capacity needed
That is not to say that challenges do not exist. One of the biggest, Frost adds, is a lack of fronting capacity willing to underwrite certain risks. A fronting company is often needed for regulatory purposes, especially as captives are often used to write risks the open market will not underwrite—or will underwrite, but at too high a price.“That is a challenge,” he says. “There are not enough fronting companies available at the moment. There are more coming to the market but right now that remains a challenge.”McMahon concurs. “We have found that to be a specific challenge on certain projects. There is not always the fronting company at one end and there is sometimes not the reinsurance capacity at the other.”A second challenge specific to offshore domiciles such as Bermuda are regulatory initiatives and directives coming from Europe and the OECD. Economic substance rules in particular, are challenging.Frost says. “The concern seems to be around companies not paying tax, but that doesn’t really happen. It is not why people form captives here in Bermuda.”The final challenge they identify is the volatility of the investment markets. Many captives need to hold investments, for collateral purposes. But the value of those has fluctuated of late.“It is something the sector is monitoring. Captives need to make sure that investment strategies match the current investment cycle. So that is a challenge right now,” Frost says.That is not to say that Davies Group is not confident, however. The group has a global reach and reports surging interest in the use of captives from all parts of the world: from Canada to Latin America, Australia and Japan.“It seems that everywhere around the world every company needs a captive,” Frost says. “We manage captives in many different places around the world. We are expanding. We are seeing more enquiries and solid growth. It is an optimistic outlook everywhere and Bermuda is a big beneficiary of that.“We are also definitely adding to our footprint in Bermuda. We’re adding to our staff numbers, which is always a good sign. That’s tangible evidence of growth in the Bermuda market.”Nick Frost is president of Davies Captive Management. He can be contact