Bermuda's benefits, practically speaking


Craig Swan

Bermuda's benefits, practically speaking

Bermuda continues to be the premier captive domicile due to its practical risk-based regulation, quality environment that fosters business development and depth of market expertise, says Craig Swan.

From a regulatory perspective, the Bermuda Monetary Authority has been focused on ensuring that Bermuda’s regulatory environment supports the effectiveness of the domicile by maintaining a pragmatic risk-based approach that accommodates a range of business in the alternative risk transfer space—from special purpose vehicles to highend complex transactions, as well as traditional captive business.

Captives remain the core business for the Bermuda insurance market, and the Authority anticipates that this will continue, especially as there is a clear acknowledgement within Bermuda of the importance of the sector to the jurisdiction. The depth of experience in relation to captives and the ready access to the sophisticated commercial reinsurance market in Bermuda remain key attributes in a challenging global market. Those challenging conditions include a continual evolution of both the competitive and regulatory environments globally.

As the Authority continues to monitor such changes in relation to its own responsibilities, trends in incorporations over the past year indicate that the Bermuda market is maintaining its position among leading captive domiciles. There remains strong interest in Bermuda from the captive market, with continuing interest in establishing Bermuda captives covering the property and catastrophe area, as well as professional liability. There has also been an increase in interest in the life sector (long-term).

"The Authority has seen an increase in the number of inquiries regarding SPIs recently and expects this to continue as the market becomes more aware of this option."

With regard to the Authority’s own recent regulatory developments, as changes are being implemented, so new opportunities within the Bermuda market are emerging. The feedback to date from the captive and risk management community on the reclassification of Class 3 insurers, which has now been in place for more than a year, and the creation of the special purpose insurer (SPI) category has been very positive. The reclassification initiative has been particularly well received, being viewed as a beneficial development for both the Authority and the market, allowing for the appropriate level of supervision to be applied to companies based on the refined categorisations established for firms within the Class 3 category. Based on extensive consultation with the market that was involved in this initiative, firms were receptive to this change and understood the benefits that would ensue.

Early last year, the Authority began enhancing its regulatory framework to ensure that there is a specific supervisory regime in place to address and accommodate SPIs, and that there are products such as insurance-linked securities (ILS) that can be transacted through such structures. The SPI framework facilitates such transactions being conducted in Bermuda, and our focus has been refinement of our supervisory processes to ensure efficiency in establishing SPIs, along with requiring heightened transparency and disclosure among all the stakeholders involved.

SPIs are another option available to companies in the alternative risk transfer space that the Bermuda market can accommodate, alongside what might be considered more traditional products. This option provides additional capacity for insurers through use of the capital markets in an efficient manner and in an experienced, mature insurance market. The SPI option is another benefit of operating in or from Bermuda, supported by practical, risk-based regulation.

With the Authority having created the conditions from a regulatory standpoint to accommodate this type of business, recognising the developments and trends in capital market solutions being provided for the insurance industry, there has been a great level of interest in the SPI class. Last year can be considered as a transition period for SPIs. Since the SPI regime was finalised and the guidance was issued towards the end of 2009, interest from the market is now translating into incorporations. The Authority has licensed eight SPIs to date, five of them since April 1, 2010. Bermuda has attracted SPI applicants that reflect the high-end, sophisticated businesses that use the Bermuda market. To date, SPI sponsors have typically been from minimum ‘A’-rated re/insurers, and SPI investors have been high-net-worth institutions and investors (e.g. Qualified Institutional Buyers as defined under Rule 144A of the US Securities Act of 1933).

The Authority has seen an increase in the number of inquiries regarding SPIs recently and expects this to continue as the market becomes more aware of this option. The Bermuda market is in a position to pursue and provide the business opportunities related to this new class of insurer; the Authority’s focus is on continuing to provide proper licensing and oversight of SPIs from a regulatory perspective now and in the future.

In terms of the international regulatory environment, change continues at a brisk pace. The Authority remains fully engaged in contributing to, as well as monitoring, such changes, in particular the initiatives of the International Association of Insurance Supervisors (IAIS). The overall focus is to ensure that Bermuda’s regulatory framework maintains consistency with changes promulgated by the IAIS, the global standard-setter for the insurance industry. However,the Authority has also been working towards the key strategic goal of gaining regulatory equivalence under Solvency II for Bermuda’s insurance regulations. Significant progress has been completed to date on a range of regulatory framework enhancements that are in line with the technical requirements of the directive. These changes include: the introduction of a framework to permit the use of approved internal models to determine regulatory capital for Bermuda’s largest re/insurers, with a pilot of the Authority’s applications and assessment process currently underway; issuing an Insurer Code of Conduct; and establishing a new group supervision regime.

However, while the recent regulatory framework enhancements that the Authority has put in place have been primarily focused on the commercial sector, it has also been monitoring the ongoing debate surrounding the treatment of captive insurers under Solvency II. The Authority believes that its regulatory framework for this sector is appropriate and consistent with existing international standards. It therefore does not envision broad changes to its captive regime at this time.

However, the Authority is keeping abreast of international developments on this front that may impact the captive sector, including those related to Solvency II, and will evaluate any changes in global standards within the context of its progressive programme of overall framework enhancements. The Authority continues to be mindful of the impact of such changes on Bermuda market participants, and remains committed to adopting international standards intelligently and in a manner that is appropriate for the nature of the Bermuda market.

Craig Swan is the director of policy, research and risk assessment at the Bermuda Monetary Authority. He can be contacted at:

Captive International