SACs rise as a major option on Bermuda

Segregated accounts companies are continuing to grow in popularity. Nicola Hallett and Mike Woytowicz of Artex in Bermuda analyse the key drivers behind that growth and developments in this area over the past year.

Segregated accounts companies are increasing in number. What’s behind this growth and what have been the main developments in this area?

Segregated accounts companies (SACs) have experienced significant growth in recent years due to several important advantages over single parent captives. SACs offer a faster setup process and significant cost-efficiencies. SACs provide an easy entry point to the captive concept, requiring less capital compared to standalone captives.

“Bermuda has been a pioneer in developing ring-fenced cell structures.”Nicola Hallett, Artex in Bermuda

SACs have created opportunities for innovative legal structures and are now commonly used in various industries such as insurance, reinsurance, digital asset businesses and multi-class investment funds. SACs also serve as an option for insureds looking to separate different risk portfolios. As companies mature financially, even smaller firms can consider SACs for their risk-financing needs.

Bermuda has been a pioneer in developing ring-fenced cell structures, initially through private acts and later through legislation under the Segregated Accounts Companies Act 2000 (SAC Act). The SAC Act has served the industry well, and the Bermuda courts have upheld the robustness of the statutory ring-fencing of assets and liabilities associated with SACs.

What are the main benefits of a SAC?

There are numerous benefits. First, the assets and liabilities of each cell within the SAC are kept separate from the other cells, ensuring that there is no commingling of funds. This provides a higher level of protection for the assets within each account. Additionally, the SAC Act includes provisions that prevent creditors enforcing their claims against assets that are not linked to the specific segregated account, further safeguarding the assets within each cell.

As discussed earlier, SACs offer a cost, capital and time-efficient solution to companies. They provide companies with a more efficient risk retention vehicle, allowing them to retain and manage their own risk. By utilising a SAC, companies can streamline their insurance operations and reduce administrative burdens. The core of the SAC manages the majority of the governance and regulatory requirements, making it less burdensome for the participants of the individual cells within the SAC.

The SAC structure allows the transfer of business within the segregated account through a novation or commutation. This provides flexibility for companies to manage their insurance portfolios and make changes as needed.

“The number of jurisdictions with SAC legislation is expected to increase in the future.” Mike Woytowicz, Artex in Bermuda

Has the Bermuda government made or proposed any changes to the SAC Act?

There are two key points at play, that involve both the Bermuda government and the Bermuda Monetary Authority (BMA).

Since 2019, the Bermuda government has introduced two forms of legislation to govern the creation and operation of segregated accounts or cells in Bermuda—this legislation may not exist in many other jurisdictions. These are the SAC Act and the Incorporated Segregated Accounts Companies Act 2019 (ISAC Act).

Both forms of legislation ensure that the assets of individual cells are ring-fenced from the creditors of other cells. Each cell can also be wound up without impacting the other cells.

While SACs and ISACs may appear similar, there is a key distinction between the two. An ISAC has a separate legal personality and, unless stated otherwise in its memorandum, possesses the capacity, rights, powers and privileges of a natural person. This fundamental difference sets ISACs apart from SACs.

The BMA issued a Guidance Note in July 2024 for stakeholder consultation. The Guidance Note, titled “General Business Insurers with Segregated Accounts and Separate Accounts”, outlines the BMA’s expectations for companies using segregated accounts and separate accounts to conduct regulated insurance business. It will be effective from January 1, 2025.

This Guidance Note applies to insurers who maintain segregated accounts under the SAC Act. Currently, industry bodies, including the Bermuda Captive Network and other working groups, are reviewing the Guidance Note and providing feedback to the BMA within the consultation period deadline.

The proposed changes by the BMA aim to prioritise policyholder protection. The BMA aims to ensure that the protection provided is consistent with that given to the policyholders of insurers conducting business outside the SAC Act.

Artex is actively engaged in the industry working groups that are reviewing and providing feedback on the proposed Guidance Note, but it’s important to note that any feedback given by Artex is not publicly available.

What do you see in the long-term future for SACs?

SACs continue to attract significant attention as they are valuable in supporting complex insurance transactions or to manage a specific insurance. They remain a fast-growing, modern and convenient option for companies. The number of jurisdictions with SAC legislation is expected to increase in the future.

The insurance market is constantly evolving, with specialist and emerging risks such as environmental, social, and corporate governance issues and environmental liability gaining prominence. As companies seek innovative ways to manage these risks, alternative risk-financing structures are being considered. SACs offer a flexible and efficient option in this regard, allowing companies to adapt to the changing landscape and effectively address these specialised risks.

What role has Bermuda played in growing SACs?

SACs have been in existence since the 1990s in Bermuda, and other leading domiciles are now following suit by allowing SACs in some form or another. For example, Vermont has introduced protected cell companies that resemble the Bermuda SAC structure.

Bermuda has been at the forefront of the SAC concept, thanks to its extensive experience in developing captives. As captives gained popularity, the concept of the rent-a-captive emerged, which naturally evolved into the SAC. Bermuda’s deep expertise in captives paved the way for the innovative SAC structure and it is essential that we remain a global competitor.

Nicola Hallett is managing director, Artex in Bermuda. She can be contacted at: nicola_hallett@artexrisk.com

Mike Woytowicz is director of business development, Artex in Bermuda. He can be contacted at: mike_woytowicz@artexrisk.com

Click here to read Captive International's Bermuda Focus 2024 publication. 

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