The Bermuda captive market has the potential to unlock significant global opportunity, from Latin American markets to US healthcare and emerging risk. Here the EY team provide their thoughts on the breadth of the opportunity.
It is exactly this capability that has helped to attract a number of Latin American captives to Bermuda’s shores and there is every expectation that others will follow. Philip Burrill, partner at EY financial services, said that he views the Latin American market as a “sizeable opportunity for Bermuda”, with the Island able to play on its existing strengths as it looks to attract new business.
“Ours is a compelling story that will undoubtedly resonate within the Latin American market,” he said, and with new Latin American formations already making their presence felt on the Island, a certain level of momentum is likely to be created. “All it takes are one or two success stories.” With Bermuda’s track record of captive success, it seems likely that such experiences won’t be a long time in coming.
Chris Maiato, principal at EY financial services, said that Bermuda is well-positioned to capture Latin American business thanks to the “wealth of captive experience on the Island—from service providers, to the regulator and the commercial market. Bermuda appreciates exactly what it is that captives do and how they operate”. This understanding enables the Island’s captive industry and its regulator to optimise the captive experience.
“Appreciation of the needs of captives—reflected in practical regulatory developments such as the bifurcation of the captive and commercial markets under Solvency II—is a hallmark of the market and one that will stand the Island in good stead when it looks to attract companies and risks to the market,” said Maiato.
“New entrants can expect strong support from the market to establish and continue to operate their captive here in Bermuda. The Island’s outstanding bench strength and depth really do set it apart in the global captive market,” he said. Complementing the talent and regulatory environment is access to Bermuda’s impressive reinsurance market, said Burrill, a strength that few offshore—and even onshore—domiciles can match. With many captives looking to buy reinsurance to complement their risk management, it represents an attractive addition to the Island’s offering.
Paul Phillips, partner at EY financial services, added that “with fronting and double fronting considerations required for certain Latin American countries, there are a few hurdles that need to be overcome when structuring a captive”.
“When parents do pull the trigger on a transaction they want the comfort of a secure domicile that can meet all their essential needs,” he said.
Bermuda is one of the few domiciles that can satisfy all that a captive parent might desire in terms of its insurance and reinsurance needs. As Karey Dearden, executive director at EY financial services, explained, “Bermuda delivers a truly holistic approach to the captive market, as an established domicile with considerable commercial credence.” This certainty is exactly what new captives—such as those coming from Latin America—are looking for in a captive domicile. “Many captives from Latin America will be testing the water,” said Burrill. They are likely to find the waters warm in Bermuda.
Burrill added that he expects the development of Latin American captives to follow a similar arc to that of the North American and European captives that have come before them. “Companies will likely start by writing lines such as property, in order to get comfortable with the captive concept. We don’t anticipate an imminent wave of new formations in other lines at first, but the long-term potential is significant,” with more risks being added to the Latin American market mix.
He added that Bermuda will need to be attuned to the particular needs of the South American market, which values face-to-face interaction more than Europe or the US, but said he was confident that Bermuda can “navigate the differences and benefit”.
Healthcare: an uncertain opportunity
The developing healthcare situation in the US also presents opportunities for Bermuda, but as the EY team made clear, unlocking such risks will not be without its challenges. First among them is the emphasis on placing healthcare risks within the US. Dearden said that Employee Retirement Income Security Act (ERISA) rules, which apply to employee-sponsored health insurance coverage, will likely limit the amount of risk that will make its way into non-US captives.
“If captives are under the ERISA umbrella, there are requirements for Department of Labor approval to transfer that risk.” This is more difficult in the case of offshore entities and Dearden said that unless these requirements can be met, they would likely reduce opportunities to take on more US healthcare risk associated with reforms under the Affordable Care Act. Outside the ERISA umbrella, however, there will be opportunities, said Burrill, but “ERISA suggests domestic captives will be the emphasis of healthcare risk transfer”.
The second major issue that Bermuda will have to overcome if it is to take on more US healthcare risk is Cayman’s traditional lead in the space, said Phillips. “Once parents have navigated through the ERISA rules, many will want to simply turn their attentions to Cayman as the premier healthcare domicile. It may be difficult to overturn such historical trends,” said Phillips.
The team was, however, bullish overall about Bermuda tapping into the healthcare market, saying a number of large-scale health and life players have redomesticated to Bermuda and with that push the Island is building an increasingly competitive infrastructure for healthcare captives. Coupled with the strengths outlined above, EY believes, Bermuda could win some of that future business. Cayman is the first choice in captive healthcare, but Bermuda certainly has a fair play.
Innovation and new risk
When it comes to innovation within the insurance industry, Bermuda has often been at the forefront of developments. Its special purpose insurer (SPI) legislation has been one such recent example of innovative thinking that has proved a major boon to the Island, said Burrill.
“The SPI legislation prompted a major shift in the insurance-linked assets (ILA) space, establishing Bermuda as the number one domicile globally for the ILA market.” He added that the Island is well-positioned to develop concepts and structures in a collateralised format, while its regulatory environment enables entities to be established quickly and efficiently from a capital perspective.
Captives can expect to benefit from the structuring capabilities of Bermuda—its speed to market and its willingness to consider new structures and ways to transfer risk. Dearden added that Bermuda can expect to build on these successes, with the Island benefiting from “a mindset for innovation that will encourage the evolution and development of new opportunities”.
Burrill said that with the Bermuda Monetary Authority taking a practical and sensible approach to regulation and the regulator pursuing a consultative approach to change, the Island can continue to respond to the needs and potential of the captive and wider insurance markets. New risks such as cyber also offer the potential for Bermuda to further cement its reputation for innovation. As Maiato outlined, “Bermuda is well-placed to underwrite liabilities associated with issues such as cyber risk and to package those in a captive format.” The Island will be sure to nurture that appetite.
Looking ahead, it is apparent that Bermuda is ready to respond to the changing demands of the captive market. As Burrill explained, whereas now approximately 85 percent of Bermuda’s captive business is sourced from the US, rising interest from emerging markets in the captive concept will slowly change the make-up and dynamics of captive entities on the Island. “As the captive concept becomes more global, Bermuda can expect to benefit.”
It will, however, also need to respond and evolve as is evidenced, for example, in the Spanish language sessions at the most recent Captive Conference. At the same time, the emergence of new risks will encourage existing captive participants to re-examine the reasons behind their formation.
“We have an opportunity as a jurisdiction to work with parent companies to ensure they are considering all the possible risks that they can put through their captive.” By helping parent companies understand and develop the potential of their captives, Bermuda will position itself to remain at the forefront of developments and growth in the global captive sector.
EY, captive insurance, ERISA