Striking a balance
Twenty years ago, Bermuda dominated the captives sector. Now, with the competition becoming more organised, Bermuda is ready to fight to protect its market share.
It must play to its strengths and leverage the mixture of stability and innovation that have contributed so much to its success, says Peter Willitts, a Bermuda director of the Bermuda Captive Owners Association (BCOA).
“Bermuda has been very fortunate in terms of political and regulatory consistency over the years. But if you were to look at our competition, there are now numerous domiciles that are setting up, making it a bigger and more active playing field,” says Willitts.
He believes that all domiciles need to illustrate they have a sustainable infrastructure in order to be successful in the captive arena. A domicile with only six captives is unlikely to have a regulator that specialises in this niche area. Contrast that with Bermuda, which has many thousands of people working within and around the industry.
“There is an amazing depth of professionals who spend all their lives looking at insurance on the Island. The captive industry is only one small part of the huge re/insurance market on Bermuda. Therefore, we have highly specialised individuals in a very small area,” he says.
Business is booming
Bermuda’s newest influx of clients has come from the world of insurance-linked securities (ILS). In 2014, 65 insurance-related companies were incorporated on the Island, including 28 special purpose insurers.
This compares to 20 years ago when, according to Willitts, there would have been large corporations setting up three-line casualty programmes. Now there are only one or two incorporations a year like that. Currently it is mainly association-type group captives or captives specialising in professional liability coverage.
The location from where the majority of captives are coming has remained the same: the US. This is starting to change, however, and Bermuda has been actively expanding its horizons seeking to secure the business of Canadian and Latin American companies, and the association has one European member.
According to some estimates, nearly two-thirds of all Latin America-owned captives in the world are being formed in Bermuda. This figure is backed up by the fact that in 2013 nearly a third of all newly-formed captives in Bermuda had a Latin American parent.
The growing popularity of Bermuda has allowed the BCOA to boom. Its aim is simple: to improve Bermuda-domiciled captives and to encourage awareness of Bermuda as a captive domicile by providing education, networking and information to captive owners.
“There’s no other domicile that has an organisation specifically for captive owners. It’s incredibly important for owners to constantly evaluate whether Bermuda is the right choice and so far, it is,” says Willitts.
“It seemed appropriate that if we want to allow captive owners to talk to other captive owners, then you have to have a mechanism to make this happen, hence the resurgence in the association. The market in general has been very supportive and I think the motivation is that the association can spearhead a bid to attract more captives, and captive owners are definitely the best sales representatives for the Island.”
"Are we in competition with US domiciles which have created aggressive self-procurement legislation? Yes. Are we in competition with the UK? Yes. But this is definitely a good thing.”
At the Bermuda Captive Conference (June 8–10, 2015), the association will be operating a very busy schedule; with an event every day as well as manning a booth throughout the conference. Willitts says that another factor for the continued success of the association is its quarterly training sessions.
“We conducted a self-procurement training session, which is something that would only interest captive owners that are not dealing with the insurance or ‘fronting’ market. Solid educational sessions like these attract captive owners who feel knowledgeable and make the association worthwhile.”
Gearing up for equivalence
As Solvency II looms over Europe, Bermuda has chosen its course. As a domicile, the insurance market is seeking full equivalence and is hoping the upcoming European Insurance and Occupational Pension Authority’s (EIOPA) inspection turns this into reality. However, Bermuda has carved out captives from equivalence, which could give the Island the edge in this space.
“Captives are appropriately regulated in Bermuda and I don’t expect more captive regulation in the short term. I do however see regulation like the US Foreign Account Tax Compliance Act (FATCA) and the equivalent international requirements continuously being developed,” says Willitts.
Potentially counteracting Bermuda’s attractiveness as a domicile for captives, is the US Internal Revenue Service’s (IRS) ever-increasing awareness of captives and potential abuses. Earlier this year, the IRS included abuse of a legitimate tax structure through the use of small or micro captives on its annual ‘Dirty Dozen’ list of tax scams.
“In the abusive structure, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organisational documents and preparing initial filings to state insurance authorities and the IRS,” said the IRS.
Willitts says that while this is not a specific worry for the BCOA, he does acknowledge a risk of getting caught in a wider regulatory shift.
“On behalf of the BCOA, most members of which are voluntarily US tax payers, I believe this does not concern us as this is far more prevalent in the less regulated domiciles. But I do think that as the IRS and other US legal bodies become more in tune internationally, we may get swept up,” he says.
Back to the future
Over the next 10 years, Willitts expects Bermuda to retain the status quo in the captive industry, despite increasing competition.
“We’re going to continue to attract companies that are interested in quality service and regulation and probably want access to the reinsurance market. There is no other domicile that can provide that sort of an environment and I can’t see that changing any time soon,” he says.
He believes that competition is ultimately good for the entire captive industry, and Bermuda will come out stronger for it. In March this year, the UK government unveiled plans to change regulations to allow ILS to be domiciled in the country.
“Other domiciles are constantly trying to replicate what we have in Bermuda. Are we in competition with US domiciles which have created aggressive self-procurement legislation? Yes. Are we in competition with the UK? Yes. But this is definitely a good thing,” he adds.
For Bermuda to retain its title and incredible success, owners and professionals must be prepared to stand up and be proud of the industry on the Island.
“I do believe that where bodies like ourselves, the industry and the regulators continue to work in unison, captives will flourish. It’s a difficult balance to achieve, but Bermuda has historically done a very good job and I expect this to continue.”