17 June 2016Bermuda analysis

Step into the captive waters

Bermuda pioneered the development of separate account or cell legislation by private act of the Bermuda parliament in the early 1990s. In 2000, Bermuda introduced its own public cell company legislation with the enactment of the Segregated Accounts Companies Act 2000 (SAC Act), as amended. The SAC Act has drawn on the experience of public protected cell legislation in other offshore jurisdictions. Although private act structures are still sometimes utilised in very bespoke situations, use of the public SAC Act is by far the preferred structure.

The Bermuda segregated account regime is frequently used in the insurance industry today and has developed as an innovative way to structure a ‘rent-a-captive’ model. It is worth noting that the cell structure is not only useful in the captive market space or the larger commercial re/insurance industry but has the flexibility to suit structures in a range of industries. For example, in the funds industry, the use of sub-funds constituted as individual segregated accounts within a multi-strategy umbrella fund structure is widely utilised.

A key reason for the continued strength of the Bermuda market is that the legislative environment is and continues to be flexible but responsible. We are always looking to innovate and respond to the latest market trends, and in this spirit, Bermuda is currently exploring proposals to introduce incorporated cell company legislation.

What is a segregated accounts company (SAC)?

A SAC is a single legal entity that has the ability to create ‘segregated accounts’ or cells in order to isolate the assets and liabilities attributable to a particular segregated account from those attributable to other segregated accounts or to the segregated account or core of the company. The default provision under the SAC Act is that each of these segregated accounts, and the assets and liabilities held within them, is separate and unlinked to the SAC’s general account.

Key features

The SAC Act contains detailed firewall provisions to the effect that the assets linked to a segregated account can only be used to meet liabilities of that segregated account and not the liabilities of any other segregated account, the shareholders generally or the creditors of the company. It is also noteworthy that the insolvency of one segregated account will not automatically result in the insolvency of any other segregated accounts or the general account of the company.

It is worth emphasising that the Bermuda courts have stress-tested the legal efficacy and enforceability of these firewall protection provisions. In BNY AIS Nominees Limited et al v New Stream Capital Fund (known as the Gottex case) the key principle of segregation between the different accounts under the SAC Act was upheld by the Bermuda Commercial Court.

Under the SAC Act each segregated account is not a separate legal entity. The SAC Act does, however, confer some of the attributes of separate corporate personality on a segregated account. For example, a segregated account can enter into contracts and sue and be sued in respect of a particular segregated account. Also, in the event of insolvency of a particular segregated account, it is possible for a receiver to be appointed in respect of that segregated account only without impacting the integrity of the rest of the structure.

An investor can enter and exit a specific segregated account either contractually or by becoming a shareholder of shares issued by the SAC and linked to a particular segregated account. This arrangement will be governed by a ‘governing instrument’ which, in the case of a contractual arrangement will be a participation agreement, and in the case of share participation will be documented by the by-laws of the company, or a shareholders’ agreement, or both together with a subscription agreement.

A key feature of the SAC Act is its flexibility; the parties can craft provisions that are suitable to their needs and the only essential requirements are that the governing instrument should be subject to Bermuda law and legal process.

The operator of the SAC structure is required to appoint and maintain a segregated account representative in Bermuda who must be approved by the Minister of Finance. In the case of an insurer registered under the SAC Act, this is typically the principal representative who is already appointed under the Insurance Act 1978 and its related regulations.

How are segregated accounts useful for captives?

The captive insurance company, considered one of the world’s first alternative risk products, was developed in Bermuda by Fred Reiss in the 1960s. Shortly after captives emerged in the insurance space, Bermuda became the first country to formalise the captive industry with comprehensive legislation, licensing and oversight procedures.

The Bermuda SAC regime became particularly attractive in the rent-a-captive context. A rent-a-captive is a structure in which a sponsor (typically, an insurance captive manager, an insurance broker, or an insurance company) will set up a captive insurance company and ‘rent’ the capital, licence and underwriting infrastructure of the captive to programme participants. Capable of writing both direct insurance and reinsurance, segregated account facilities divide their clients’ risk(s) into segregated accounts.

Smaller companies find this structure particularly attractive as the cost of establishing a standalone captive may otherwise make the proposed insurance programme not viable. In a segregated account rent-a-captive, the SAC Act creates a statutory firewall between each participant’s programme to isolate each participant from the claims of creditors of other participants.

Segregated account structures can also be designed to segregate different programmes of business, for example life and short-term business, within larger commercial re/insurers. This not only provides the traditional firewall segregated account protections but also makes each separate book of business, with its own financial statements and records, much more attractive to potential acquirers. The use of segregated accounts to separate out books of business can also be extended to differentiate between active and run-off business.

It is also worth noting that in recent years we have seen fully collateralised special purpose insurance programmes being housed in segregated account structures. This has proved to be an exciting evolution of the SAC structure and consistent with the spirit of responsible innovation that has been key to Bermuda’s continuing success in the insurance space.

Towards an incorporated SAC?

As noted in the introduction, Bermuda is considering adopting its own incorporated cell company legislation and associated regulatory framework.

An incorporated segregated accounts company (ISAC) would represent a hybrid of the SAC and the conventional limited liability company. A key differentiator from the current regime is that each incorporated segregated account would have separate legal personality. The ISAC regime could also offer opportunities for mixed ‘hybrids’ and multiple-regulated incorporated segregated accounts and provide opportunities to pool professional support. We will continue to monitor development in this space.

Although jurisdictions providing alternative corporate solutions have challenged Bermuda with a view to gaining a competitive advantage, Bermuda continues to represent a sophisticated world-class insurance regulatory framework which has recently been validated with the award of Solvency II full equivalence in its commercial sector. The Bermuda proposition has succeeded because of a unique combination of innovation and creativity together with regulatory excellence.

We are confident that Bermuda will continue to develop bespoke and dynamic solutions in the captive space and in offshore product development more generally. Through effective legislation and innovation, the Bermuda captive and rent-a-captive markets will continue to thrive.

Neil Horner is head of corporate at ASW Law. He can be contacted at:

Maryssa Gabriel is an associate in the ASW Law corporate team. She can be contacted at: