Bermuda and Canada's TIEA


Bermuda Captive

Bermuda and Canada's TIEA

Bermuda has signed a number of tax information exchange agreements. None appears to have been more significant than that signed with Canada. Implications for the captive sector and future growth are discussed.

Ratified on July 1, 2011, the Bermuda-Canada tax information exchange agreement (TIEA) looks set to have lasting implications for the Island’s captive sector. As Lawrence Bird, president of the Bermuda Insurance Management Association (BIMA) and managing director of Marsh IAS Management Services (Bermuda) indicated, the agreement is a “significant development and cements the already close links between Bermuda and Canada”.

The agreement has helped to level the tax playing field for Bermuda, the Island having previously been at a disadvantage vis-à-vis Canadian firms’ captive domicile of choice, Barbados, which had enjoyed a longstanding tax agreement with Ottawa. As Bird made clear: “Bermuda is an important additional option for Canadian captive owners and prospective owners, and they are, rightly, exploring their options.”

Addressing the level of interest that the agreement has prompted among Canadian parent companies, David Gibbons, director of the captive assurance unit at PwC, Bermuda, said that it was difficult to fully assess the lasting implications of the treaty as it is only nine months in, but added that there had been “significant interest thus far, especially from the larger companies that typically already had captives in Canadian treaty countries. Some have already moved to Bermuda and others are expected to move in the coming year”.

Kilian Whelan, chief executive officer of JLT Insurance Management, Bermuda spoke of a similar rise in interest. “We now have two major Canadian energy companies on the books since the TIEA came into place and we are actively working on a strong pipeline of companies that are looking to form a captive in Bermuda.” He said that while interest had begun with the larger, established energy companies, JLT had started to field interest from mid-size Canadian firms considering the merits of Bermuda and captive insurance. For these firms, JLT is expecting a longer lead time—12 to 36 months—Whelan said, with new formations necessarily taking a time to appear.

Island excellence

But what exactly is it that sets Bermuda apart from the competition, and why might Canadian firms opt to redomicile away from somewhere such as Barbados? Gibbons said that three key factors are attracting Canadian firms to Bermuda. The first is “the ability to come here to underwrite business and form your entire programme out of Bermuda—a factor that cannot be overestimated”.

“Second is the prevalence of management companies and other service providers here that have the knowledge. If you have to have mind and management outside Canada, the best place to go is Bermuda. Finally, if you are looking to establish a director base, the experience and skill set is here in abundance.”

Bird spoke in a similar vein, adding that “its location, its robust yet pragmatic regulation and even its cost, which despite misconceptions compares favourably with most competing domiciles, makes Bermuda an attractive alternative”. Finally, there is the not insignificant ability to access the Island’s significant commercial re/insurance market. As Whelan outlined, companies often have group interests in Bermuda and, by locating their captives on the Island, they can access group reinsurance, finance and subsidiary functions all in one location.

Captive structures

Casualty risks predominate among those Canadian captives that are opting for Bermuda’s shores, said Bird, with property risks backed by reinsurance or excess placements an increasingly prevalent addition to captive programmes. Thus far the larger single-parent captives have dominated the field, reflecting the size and nature of the Canadian energy firms that have led the charge, and it seems likely that such an emphasis on single-parent captives will continue.

As Gibbons indicated, the early movers were dominated by larger captives because “their insurance and reinsurance structures were so significant that an immediate move made sense to them”. Nevertheless, Bird and Whelan were keen to make it clear that Bermuda is equally geared up for small and medium-sized captives from Canada, and beyond.

Regulatory leadership

For many captive owners the issue of Solvency II has been an ongoing concern, and with Bermuda opting for equivalency for the commercial sector there might have been a danger that Europe’s regulatory regime would prompt some Canadian parents to consider other, less prescriptive captive domiciles. However, recent discussions between Bermuda and Brussels appear set to allow Bermuda to apply a segmented approach to regulation, in which captives may fall outside the full scope of Solvency II.

As Bird indicated, “being in the first round of equivalency testing for Solvency II purposes has benefited Bermuda as it has embraced the principles of the regime and yet maintained its existing solvency and capital requirements for captives. Arguably, from the perspective of tax deductibility and exempt surplus repatriation for Canadian-owned captives, this position can only strengthen Bermuda’s position within a group’s risk management strategy and with tax and regulatory authorities in the parent’s country”.

"Thus far the larger single-parent captives have dominated the field, reflecting the size and nature of the canadian energy firms that have led the charge."

Further helping matters is the positive regard in which the Bermuda Monetary Authority (BMA) is held internationally. Bird said that the BMA is viewed as being “robust yet pragmatic, with excellent dialogue between the regulator and the captive owners’ representatives”. It is this close dialogue with captives that will be a key differentiator as the Island looks to compete with other domiciles for Canadian firms which are considering a captive home. As Whelan outlined, captive owners “want to be able to actively communicate with the regulator in order to ensure that they understand their specific business needs”. At the same time, the BMA’s consultative approach for owners seeking to move here enables the Island to achieve enviable speed to market, a factor that continues to set Bermuda apart from the competition, said Gibbons.

Canadian questions

Finally, turning to the questions that Canadian clients are asking of the Bermuda industry, the three industry leaders outlined a range of issues. For Bird, the key questions relate to infrastructure, regulation and cost. He said that one of the enduring myths about Bermuda is that it is an expensive jurisdiction in which to do business. By comparing Bermuda with competing jurisdictions, however, Bird said that it is possible to dispel such misconceptions.

Gibbons reiterated this point, indicating that “for those with established captives, when they look at Bermuda they see that the benefits outweigh the costs”. The question of cost largely arises in conversations with those considering establishing a new captive, he said, but without a “detailed analysis it is unlikely you will be able to weight the costs and benefits of being located in a jurisdiction such as Bermuda”. Companies that have opted for Bermuda have been “happy with the professionalism of the captive sector and its connections with the insurance and reinsurance industry on the Island”, he said.

Whelan concluded that the quality of service providers—an area in which Bermuda has considerable strength—is another issue raised in such conversations, as is the benefit of the Island’s close proximity to Canada. It seems that Bermuda has little to fear from such examinations of the Island’s captive landscape, with the recent TIEA and rising Canadian interest likely to add further captive numbers to Bermuda’s already impressive field.

Bermuda, Canada, TIEAs, BIMA, JLT, PwC, captive, insurance

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