So, you are interested in forming a captive insurance company. Perhaps your company wants to benefit from the lower cost of insurance when compared with premiums paid to third-party insurers; or perhaps you need to obtain insurance for a type of risk that is proving difficult to cover in the commercial insurance market. In any event, you believe that a captive insurer is the answer to your problems – you just need to know what to do next. This article examines some of the key aspects of setting up a captive insurer in Bermuda.
Generally, when thinking about entering the world of captive insurance, a company will engage a risk management expert to perform a detailed review of its business, including an assessment of the company's risk profile and its objectives. While the formation of a captive insurer may be an excellent risk mitigation tool, it is not necessarily the correct solution for everyone and so the completion of a feasibility study will allow the company to determine whether or not the formation of a captive is appropriate for its business.
Choosing a jurisdiction
Another important step in establishing a captive insurer is choosing the jurisdiction in which it will be established. There are a number of options to choose from; however, Bermuda is widely viewed as being the preeminent jurisdiction for offshore insurance vehicles.
There are a number of reasons that set Bermuda apart from other jurisdictions:
- As at 31 December 2018, 711 captive insurers were registered in Bermuda with premiums of approximately $40bn
- A sophisticated and robust legal and regulatory environment
- Industry groups (representing insurers, reinsurers and insurance intermediaries) are based on-island which advocate for their stakeholders to government, the regulators and on the international stage
- All of the 'limbs' of the insurance industry are based on-island. As such, an insurer can access its reinsurers, insurance manager, auditor, actuary, accountants and lawyers, on-island and within a one-mile radius.
- It has its own stock exchange
- It is accredited under the NAIC, which means that Bermuda-based insurers can operate in the US without additional capital requirements
- Its insurance regime has equivalency under the EU's Solvency II Directive and so Bermuda insurers writing business into Europe are not be penalised by the imposition of additional collateral and regulatory hurdles. However, Bermuda's insurance regime is bifurcated, meaning that captives fall outside the remit of the Solvency II regime and, as a result, are not burdened with inappropriate requirements.
Incorporating in Bermuda
The majority of Bermuda insurance companies are incorporated as exempted companies limited by shares (i.e., companies that are predominantly owned by non-Bermudians and conduct business outside Bermuda from a place of business within Bermuda). An insurer may take other forms (such as local companies, companies limited by guarantee, mutual companies and permit companies), but such forms are relatively uncommon – particularly with respect to captives.
Generally, the incorporation, organisation and ongoing administration of a Bermuda company are managed by a corporate services provider based in Bermuda. A Bermuda company can be incorporated and organised in approximately 2-3 business days. The process has a number of steps, including: registration of the proposed name; collation of applicable 'know your customer' information for the instructing party, the proposed directors, the direct shareholders and any beneficial owners; registration with the Bermuda regulator; and adopting board and shareholder resolutions.
Licensing in Bermuda
To carry on insurance business in or from within Bermuda, a Bermuda company must be licensed as an insurer under the Insurance Act 1978.
The class of insurer will depend on a number of factors, including the type of insurance business being written, the amount of "unrelated business" being written, the amount of premium, total assets and the amount of collateral.
Captive insurers writing general business (e.g., property and casualty insurance) fall into the following categories:
- Class 1, being a company that is wholly-owned by one person or is an affiliate of a group and only insures the risks of that person or group;
- Class 2, being a company that is wholly-owned by two or more unrelated persons and at least 80% of the net premiums written by such insurer will be in respect of the risks of such persons or their affiliates (or the risks which arise out of the business or operations of such persons of their affiliates); and
- Class 3, being a company that is not registrable as a Class 1 or Class 2 insurer and which does not fall into any class of commercial insurer.
Captive insurers writing long-term business (e.g., life and/or long-term accident and health insurance) fall into the following categories:
- Class A, being a company that is wholly-owned by one person or is an affiliate of a group and only insures the risks of that person or group; and
- Class B, being a company that is wholly-owned by two or more unrelated persons and at least 80% of the premiums and other considerations written by such insurer will be in respect of the risks of such persons or their affiliates (or the risks which arise out of the business or operations of such persons of their affiliates);
Once the class has been ascertained, the insurer will need to be licensed. In Bermuda, prospective insurers typically engage a law firm who will (often in concert with the insurance manager) guide them through the licensing process.
The licensing process requires an application to be submitted to the Bermuda Monetary Authority, the body that is responsible for regulating Bermuda's insurance industry (BMA). The application should include:
- a business plan that sets forth information on the business purpose for licensing in Bermuda, ownership structure, the board of directors and senior management, capitalisation and sources of funding and the type of business to be conducted;
- financial statements, including pro forma income statements and balance sheets prepared on a 5-year statutory financial basis;
- drafts of any applicable insurance/reinsurance agreements;
- information in respect of the board of directors, senior management and shareholders; and
- confirmation of the appointment of applicable service providers.
Once the application has been approved and prior to the issuance of the licence by the BMA, the captive must be capitalised to the amount stated in its business plan and the applicable licensing fee paid.
Overall, the licensing process can be completed relatively quickly (approximately 3-4 weeks), although the timeframe is contingent upon the complexity of the insurance programme and the collation of the documents needed for the insurance application. Also, the BMA has discretion to require additional information and has discretion to defer or decline the application, which can further delay the process. However, once the captive has been licensed, it can provide the insurance cover for which it was created.
During its life, the captive will be subject to ongoing legal and regulatory requirements and, in many cases, the insurance manager (which is often the risk management company that performed the feasibility study at the outset of the process) and the corporate services provider will be engaged to oversee its operations and ensure compliance with such requirements.
Examples of ongoing requirements include maintaining a minimum margin of solvency (as determined by its class), preparing and filing audited statutory financial statements and statutory financial returns with the BMA, and ensuring compliance with the code of conduct that is applicable to all Bermuda insurers. In addition, captives are required to obtain the approval of the BMA before taking certain actions, such as changing a shareholder controller, declaring or paying dividends if it would cause the insurer to fail to meet its relevant margins, or reducing its total statutory capital by a certain amount.
Bermuda is the natural domicile of choice for captive insurers due to the jurisdiction's longstanding relationship with the international insurance industry, its modern, sophisticated regulatory environment and its deep roster of service providers that can assist with the formation, licensing and running of the company. This combination of factors means that Bermuda can offer an insurance solution for all prospective captive owners. The only question is: when do you want to set-up your captive insurer in Bermuda?
An original version of this article was published by Captive Review, June 2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.