A decade of change

Established in 1977, the Bermuda Insurance Management Association (BIMA) has been at the heart of the development of the re/insurance industry in Bermuda. From the roots and humble beginnings of the industry, through waves of innovation and growth, to its current emergence as the domicile of choice for many classes of insurers, BIMA has been an integral part in every stage of the evolutionary process.

Robert Paton is the current BIMA president and executive vice president at Aon Insurance Managers. His post at Aon has provided him with a perspective that takes in much of the Island’s development in this sector.

He first arrived in Bermuda in 1989 while working for one of the leading audit firms on the island, Ernst & Young. He later moved into various captive management roles which eventually led to Aon. He has been closely involved with BIMA for five years and has served as president for the past year and vice president for the two preceding years.

Since its formation, BIMA has represented the insurance management community and has played a vital role in the evolution of the regulatory environment which governs and protects the captive industry in Bermuda. As well as liaising with the Bermuda Monetary Authority (BMA) and government, it offers a unified approach to problems that may be of concern to its members.

Reflecting on the past decade—the period in which this publication has been working with Bermuda’s captive community—Paton says there has naturally been a great deal of change, especially in the regulatory environment in response to the ongoing competition Bermuda faces from other domiciles for business and also in the growing sophistication of the risk transfer mechanisms used.

Regulatory change

Ten years ago, Paton notes, the regulatory regime was less influenced by global developments compared with today. In recent years, the domicile has been paying close attention to regulatory developments elsewhere and adjusted its own regime in some instances. In many cases it has also anticipated change and been at the forefront of these amendments.

“There has been an increased focus on regulatory scrutiny in recent years and BIMA has played an important role in moving the industry forward and protecting the interests of Bermuda,” Paton says.

He further states that BIMA is now playing an important role in the anticipated securing of Bermuda’s status of ‘bifurcated equivalence’ with the Europe’s Solvency II regime. This means that the European Insurance and Occupational Pensions Authority (EIOPA) has acknowledged that Bermuda’s regulatory framework has broadly satisfied the general criteria for third country equivalence.

While the regulator is comfortable that this is the case for Bermuda’s commercial insurance sector, it has distinguished between this and the supervision of its captive sector—hence the ‘bifurcated’ equivalence. Consequently, Solvency II equivalent standards will apply to commercial insurers but not to captive insurers and special purpose insurers.

This is regarded as a positive development by BIMA, which believes it will help preserve the uniqueness of the Bermuda insurance market as the largest captive marketplace in the world.

“BIMA was actively involved over the past few years and did a lot of ground work around this approach, this included visiting Brussels to speak to the EU regulators personally,” Paton says.

“The bifurcation of the market has been critical. It has taken a lot of hard work and a considerable amount of time to achieve but our efforts, we hope, will be rewarded as this puts us in a strong position to protect the advantage that Bermuda has always had.”

Bermuda will have appropriate risk-based supervision for both commercial and captive sectors.

Paton says the US Foreign Account Tax Compliance Act (FATCA) represented another recent regulatory challenge for Bermuda. Again, BIMA has played a central role in ensuring a smooth transition to compliance with this new regime.

“Rolling it out was a challenge and we organised comprehensive training sessions with local auditors and consultants to help our members understand how it should be applied,” he says.

“We also remained close to the Bermuda government in terms of communication so that the changes and their implications were clearly understood by our members.”

He adds that such initiatives and changes are indicative of a wider movement towards a more standardised global regulatory environment. Initiatives such as Solvency II have forced other regimes to adjust accordingly. This is very different from the situation a decade ago.

“There has been a kind of globalisation of legislation and against that backdrop the existence of BIMA and its interaction with the BMA and government has been very important.

“The fact is that the captives sector is a significant contributor to the Island’s economy. The ability to pull together and speak with one voice has been very important in winning some of the battles that will help maintain this sector in the long term.”

Competition breeds professionalism

Despite this more complex regulatory regime more domiciles have emerged as contenders in the battle to attract the business of captive owners in the past 10 years. Paton admits there are “a greater number of options” available but believes this has also been a double-edged sword in some ways.

The emergence of so many onshore jurisdictions in particular has legitimised the use of captives as a risk transfer mechanism, Paton says.

“A decade ago, we still heard the negative perception around the use of captives. The fact that so many onshore states now compete for this business has, in a way, validated the industry. The arguments previously made against captives falls away when the legislation also exists in those places.”

Bermuda remains the largest domicile in numbers and premiums because of the many qualities it offers, he argues. These include the vast experience and strength of the regulatory regime, the talent present on the Island and the practical approach the BMA has shown again and again in embracing new innovations in this sector.

“Bermuda remains at the cutting edge in every sense,” he says. “The regulator has been doing its work for some 40 years now and the Island is full of professionals with significant experience in this field.

“That is why the competition argument is very easy to counter. Yes there are other options but Bermuda remains the ‘premier destination’.”

This growth and sophistication has been complemented by an increasingly professional approach to training and education in the sector through initiatives often led by BIMA. This too ensures that the Island keeps its cutting edge.

“We now organise regular training days especially around regulatory changes,” he says. “In today’s dynamic world change is constant, we look to keep our members up to date with what is going on and represent their interests at the same time.

“This is a definite change compared with 10 years ago. There is a real emphasis on training and professionalism in all senses. Everyone sets very high standards because essentially they know that it takes only one bad apple to spoil everything.”

Complexity and sophistication

The final area of change that Paton identifies based on the past decade is the sophistication of the market. A greater variety of industries now use captives, the size of the business varies more, they come from a wider spread of geographical regions and the sophistication of the structures used has developed greatly in the past 10 years.

On this last point, Paton notes the innovation in the past decade has been incredible in terms of the types of structures used. Some of these also mask the true extent of the growth of the captives sector in Bermuda.

“We see a lot of structures such as segregated cell captives being formed now, and the true number of companies using this type of risk transfer cannot be seen simply by looking at new formations,” he says.

“We are also seeing a growing variety of other types of structures being used—significantly more than was the case 10 years ago. To a certain extent you can see how some of the innovation has perhaps been inspired by what we have seen in the ILS side in recent years. A growing breadth of new structures is emerging and I think it will continue,” Paton says.

He notes that the types of companies which utilise captives have also changed. As the use of captives has become more mainstream—especially in light of the rise of onshore domiciles—smaller companies are turning to captives .

It has also seen growth from certain specific sectors such as healthcare on the back of onshore legislation. Obamacare, for example, triggered large numbers of enquiries into captive structures and many are likely to come to Bermuda. So too are companies in different parts of the world: a growing number of companies based in Canada and Latin America are choosing to base their captives on the Island.

“The common theme here is that Bermuda has the right mix of innovation combined with a risk-based regulatory approach that is recognised by international standards and complemented by deep experience,” Paton says.

“BIMA has played an important role in ensuring any changes are applied to the captives sector in a fair and contextual way. We have also been successful in countering misconceptions in recent years both in terms of the cost associated with Bermuda as a domicile and around the threat of competition.”

Robert Paton is the president of the Bermuda Insurance Management Association. Their website address is: www.bima.bm