Bermuda continues to blaze an impressive trail across the captive landscape. Here, Mark Allitt and Jason Carne of KPMG outline the Island’s continuing efforts to position itself at the forefront of captive jurisdictions.
Solvency II equivalence with a carve-out for captives. A raft of global tax information exchange agreements (TIEAs). Bermuda has taken considerable steps to maintain its leading position as the captive domicile of choice. Mark Allitt, senior manager, advisory and Jason Carne, partner, insurance at KPMG address some of the recent initiatives Bermuda has taken in the captive space and how this has affected the pipeline of new business.
How significant has the captive carve-out under Solvency II equivalence been for Bermuda?
Jason Carne - It is important in terms of both existing and potential new captives. There are no changes to their existing capital requirements. In terms of regulated reporting there will be some incremental changes that will be required, but nothing too onerous for captives to comply with. Generally, the initiative will maintain the status quo for those companies already here. And from a cost perspective, the money they pay for services should remain unchanged.
For European captives or those that have significant operations in Europe and are looking to cede business into a captive in Bermuda, it could be beneficial to be Solvency II equivalent as there is not a requirement for collateral to be posted. The cost of that collateral can be quite burdensome, so for some captives it might be cheaper to actually opt in to Solvency II in a jurisdiction such as Bermuda. Equivalence could prove an important differentiator for the Island.
Mark Allitt - Bermuda has had a lot of press coverage regarding its Solvency II strategy. This coverage has been good for the jurisdiction. Bermuda is viewed with envious eyes by the competition and the Island continues to trail-blaze from a regulatory perspective. The outcome looks likely to be positive and I think a number of other jurisdictions will ultimately follow Bermuda down the path of equivalence.
Carne - The market is somewhat unique here. We have a large and sophisticated commercial re/insurance market and that was the catalyst for the whole initiative, but then of course you have the world’s largest captive market as well. The efforts of the regulator have been fantastic in getting us to a position where we can be considered for the dual approach.
What further measures can the regulator take to strengthen the Island’s position internationally?
Carne - They have done a first class job in getting the jurisdiction into the position it is today. The growth in expertise and staffing that we have seen at the BMA in recent years has been impressive. It’s been a great example of industry and the regulator working together to come up with a solution that will provide Bermuda with a cutting edge proposition in the world market. Going forward, the key will be maintaining the Island’s momentum. We need to finish what we have started and need to be sure that we get the carve-out and the dual system.
From a governance perspective, people are experiencing more rather than less regulation, with the issue more important today than it has ever been. The code of conduct introduced by the BMA is part and parcel of what is really a global initiative to enhance governance.
Allitt – Bermuda’s regulatory system has maintained and developed the Island’s global presence by ensuring it is robust, internationally recognised and respected, but also flexible. With the regulator working closely with industry, together they can work to introduce responsible, but responsive regulation. The Bermuda Monetary Authority (BMA) understands they need to meet international expectations, while retaining that level of flexibility.
How do you see the pipeline of captive business for Bermuda? How important have recent TIEAs been in attracting new entrants?
Carne – They have been important on a number of levels. Originally the TIEAs were an OECD initiative and today, Bermuda is on no OECD or G20 blacklists, I’m not sure all our competitors can say that. From that perspective they have been very positive. The Canadian TIEA in particular has afforded Canadian multinationals beneficial tax planning opportunities. There is a lot of focus on educating that market, regarding not only the benefits of captives, but also those of the jurisdiction. We have seen some redomestications and are working on a handful ourselves. Over time I expect the number of Canadian firms opting for Bermuda to build as word gets out.
Allitt –We have seen significant movement since the Canadian TIEA came into effect on July 1, 2011—both redomestications and a pipeline of new business. Bermuda looks at those opportunities as new markets. Now the tax playing field has levelled, it represents a great opportunity to sell the captive concept to those countries. A number of TIEAs include the tax planning incentives in them, rather than simply the transparency agreement that they were originally intended to be.
Where do you see the greatest opportunities for market growth?
Allitt – Solvency II provides a pipeline of opportunities. Equivalence will make the Island more competitive to those doing business in Europe. Latin America is another area where there are significant opportunities, particularly considering the TIEAs that are being signed with the region. There’s a good, healthy pipeline there.
Carne – Some opportunities will come from coverage needs from emerging risks which are either unavailable in the commercial market or are cost prohibitive, such as cyber risk. We are likely to see insurance products designed to protect against that, which will be run through captives. Another example is pandemic risk. As the market hardens we also expect to see a number of companies looking to form captives or re-ignite an existing captive.
Allitt – In terms of structures, segregated account companies are likely to outstrip interest in group captives, which have on occasion proved to be unwieldy from a corporate perspective in the past. They get the cost benefit from using these structures, but don’t face the same level of administrative burdens that group structures tend to.
Do you expect the hardening of the commercial market to create opportunities for the captive sector?
Carne – Generally, in hard markets you see increased demand for captives in order to help companies manage their pricing. Captives that are well-managed and have strong risk management philosophies are the ones that can benefit from a turn in the commercial market.
How can Bermuda plan to head off the competition from jurisdictions such as Cayman?
Carne – The way the economy has been over the last four of five years, competition among the captive domiciles is more intense today than it has ever been. Cayman is certainly competitive, but if you look to the US, most states have captive legislation in place. You now see captives across the US, which is just one of the indicators of how intense the competition has become. Bermuda needs to continue to maintain its drive to innovate, and its desire to deliver the best value for money and best service that has consistently made it the captive domicile of choice. While I think that you always have to be watchful of the competition, I still feel very good about the Bermuda story. We also have the commercial reinsurance market here and a depth of infrastructure that is unrivalled anywhere else.
Mark Allitt is a senior manager, advisory at KPMG. He can be contacted at: firstname.lastname@example.org
Jason Carne is a partner, insurance at KPMG. He can be contacted at: email@example.com
Bermuda, KPMG, TIEAs, Solvency II, captive, insurance