In 2019, the "underwriting nature" initiative led by Swiss Re culminated in the first ever coral reef insurance policy.
The unique policy was facilitated by charity The Nature Conservancy, the Mexican government and partners covering an area of Mexican coastline that is considered vital to the health of the local environment and the closely connected tourism economy.
The coverage was triggered in 2020 by Hurricane Delta, and put in motion a widespread and well-prepared response team who repaired damage to the insured coral reef system, including transplanting 9,000 broken coral fragments and stabilising 1,200 large coral colonies.
Investors are increasingly looking to deploy capital in projects that mitigate climate risks; the coral reef risk transfer in Mexico is a good example of this.
The reasons for this relatively new investor appetite are manifold, but one driver is the positive returns that can be generated from the global transition to lower carbon industries.
Bermuda has always had open arms in terms of facilitating legitimate investment activity, including investment in the climate risk sphere.
Recent efforts by Bermuda's leadership – the government, Bermuda Business Development Agency, industry and the regulator – have coherently reiterated the climate risk finance welcome message.
Bermuda has many attributes that make it an ideal jurisdiction in which climate risk finance can flourish, some of which are summarised below.
Conservation-focused: In some ways Bermuda is a conservation-focused country in its own right. For example, the Government has initiated a process that will bring about a marine spatial plan for our marine exclusive economic zone. The MSP process will factor in stakeholder interests by way of survey, village groups and inputs from a scientific steering committee. Having taken part in the conservation village group, I can attest to this first-hand. Having its own climate risk exposure makes Bermuda well-suited to support investors and platforms with a climate risk focus.
Dedicated regulatory team: The Bermuda Monetary Authority has recently formed a regulatory and supervisory team with an array of subject matter experts that will specialise in the licensing and supervision of innovative business model proposals to address climate change risk and the associated protection gap. The team will work with climate change risk solution service providers to the financial services sectors wishing to participate in the BMA's innovation hub, an incubator for growth in this sector with regulatory oversight. This initiative will not be limited to the insurance industry. The BMA is well-versed in dealing with an array of reputable businesses from large multinational corporations to small funds and family offices.
Global risk capital: Bermuda is a world-leading risk transfer market playing host to approximately 1,200 re/insurers with total assets of $800 billion writing gross premiums of approximately $150 billion. A significant portion of this gross written premium relates to natural catastrophe risks. As such, Bermuda plays host to technical expertise and innovative market participants that will align with climate risk finance in a symbiotic manner.
Leader in transparency: Bermuda is on the European Union's "white list" meaning it is a jurisdiction being fully co-operative from a tax transparency standpoint. Bermuda also received a world-leading assessment from the Caribbean Financial Action Task Force in its anti-money laundering and antiterrorist financing assessment concluded in January 2020. Bermuda has been granted EU Solvency II equivalence meaning Bermuda has satisfied the European Insurance and Occupational Pensions Authority with respect to its insurance supervisory regime, one of only a handful of non-EU nations to obtain such a distinction. Equivalence enables Bermuda re/insurers to conduct business in the EU as though they were EU-based.
Legislation framework: Recent legislative changes also bode well for serving an influx of climate risk finance business. For example, under the Incorporated Segregated Accounts Companies Act 2019, operative as of January 15 2020, it is possible to create a corporate group structure, where each incorporated segregated account has its own "ring-fenced" assets and liabilities. Each incorporated segregated account has a separate legal identity, while benefiting from reduced administrative costs and greater efficiencies for the wider structure. The possible uses for this type of structure are boundless.
Government has focused on growing the financial technology sector of our economy. Bermuda's legislature has facilitated this by passing comprehensive digital asset business legislation – the Digital Asset Business Act 2018, as amended – and initial coin and security token offering legislation by way of amended existing legislation, accompanied by a robust regulatory framework. This legislation lays the groundwork for new avenues of fundraising that may be attractive to innovative climate risk platforms.
There are many other reasons to choose Bermuda as a domicile for climate risk finance that have not been detailed above such as the island's proximity to key markets in North America and Europe, tax-neutrality, its robust infrastructure and highly-skilled professional workforce and time-tested legal and judicial systems based on English common law.
For these reasons, Bermuda is quite right to roll out the pastel-coloured carpet to those seeking to address climate change and the climate risk finance that this will involve.
First published in The Royal Gazette, Legally Speaking, May 2021
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