Stability sets it apart

Since the summer of 2008, Bermuda has seen a significant evolution of the regulatory framework for its insurance companies and groups. Many of the early changes covered the entire Bermuda market, including captives.

However, post-2011, captives on the Island haven’t faced a lot of additional regulation. “The vast majority of changes that the Bermuda Monetary Authority (BMA) has issued since this point, have been geared towards achieving equivalence for the commercial insurers here and really attempting to leave the captive space as stable as possible,” says David Thompson, Advisory Director at KPMG.

This doesn’t mean there have been no threats to the captive industry globally. In Europe, for example, captives fall under the Solvency II framework, something that could have drastic ramifications for some. Bermuda has been keen to avoid its own captive legislation becoming caught up in the fallout from this.

According to KPMG, the prospect of Bermuda’s captive industry being caught under the Solvency II framework would have represented a potentially significant hit to both the jurisdiction and the captive world generally.

“The decision by the BMA to actively lobby to have captives scoped out from the burden of implementing Solvency II, and the subsequent agreement of the European Insurance and Occupational Pension Authority (EIOPA) and the European Commission, has been a massive win for Bermuda,” says Eric Heinrichs, Audit Director at KPMG.

If Bermuda’s captives were to have fallen under the regime, some companies’ could potentially have moved their captives to alternative domiciles to avoid what they would perceive as unnecessarily heavy-handed regulation. As it stands, however, Bermuda can clearly benefit from standing apart.

“There’s about to be a significant regulatory difference between Europe and Bermuda, and this can only strengthen the attractiveness of Bermuda as the domicile of choice for insurance captives,” Thompson says. “For captives that are also assuming an element of third party risks, Bermuda has a tailored and proportional regime that is more reflective of the overall risks than it has been in the past.”

It seems this dynamic will help Bermuda to retain its title as the leading captive jurisdiction while freeing captives from the threat of facing regulation that was disproportionate to the risks they assume.

Plugging the gaps

While all is relatively quiet on the captive front, Bermuda’s commercial insurers are still gearing up for Solvency II equivalence.

“From Bermuda’s perspective, equivalency efforts that have been undertaken over the last six or seven years have come to a head in the past six months. EIOPA’s equivalency assessment pointed out to the BMA where it saw gaps in the existing regulatory framework and where it would like to see improvement,” says Thompson.

In December 2014, the BMA issued a consultation paper on an Economic Balance Sheet framework in response to EIOPA’s latest report on Bermuda’s Solvency II equivalence. This was followed in April this year by a series of additional guidance setting out how the framework should be implemented as well as instructions for a ‘trial run’ which commences this spring.

“This is important regulation for Bermuda, and all commercial insurers have an interest in supporting the BMA in order to see this succeed,” says Heinrichs. “However, complexities associated with implementing these new proposals could be significant. The devil is in the detail and the scale of change will depend on the accounting bases that insurers use today,” he adds.

The final rules become effective starting in 2016 and require all commercial insurers—but not captives—to produce an unaudited economic or ‘fair value’ balance sheet.

“The idea is that over time this will replace the statutory balance sheet that the BMA currently uses to assess solvency,” explains Thompson.

The second major gap that the BMA has plugged surrounds the extent of public disclosure by Bermuda insurers.

“From a commercial insurer perspective, transparent financial reporting is one of the final gaps that the BMA has now addressed. This will also be important from a governance perspective for the directors, CEO and CFO who have ultimate responsibility for the information,” Heinrichs says.

Other changes to the country’s insurance regulatory regime include requiring commercial insurers incorporated in Bermuda to establish a head office in Bermuda, meaning that senior executives may need to spend more time, or possibly live, on the Island.

Plans for the future

“While captives that are part of international groups may be caught under some of the supervision changes that may happen internally at the BMA over the next few years, there’s no catalyst for change that is likely to create additional regulations for captives,” says Thompson.

He explains that this lack of potential additional regulation has allowed Bermuda to continue to actively market itself, in order to retain its leading domicile status, with minimal concerns or uncertainty over how the future regulatory landscape may look.

The BMA has also committed significant time and resources to strengthening its ties wth other jurisdictions. The relationship between the BMA and regulators in both the US and Europe continues to go from strength to strength.

“The BMA has done an excellent job in differentiating the market and recognising the differing needs of captive and commercial insurers. The current regulatory structure provides a range of options for new formations, as well as for companies that are in later stages where a strategic change would be beneficial,” Heinrichs says.

With the muddy waters of Solvency II equivalence now almost successfully navigated by the BMA, the regulatory framework for captives in Bermuda looks clear and the Island is strongly placed to continue its growth strategy as the world’s leading captive domicile.

Eric Heinrichs is a director in KPMG’s Bermuda insurance practice. He can be contacted at: ericheinrichs@kpmg.bm

David Thompson is a director in KPMG’s Bermuda advisory practice. He can be contacted at: davidthompson@kpmg.com