Bermuda: IFLR Guide to Insurance and Reinsurance

Co-authored by Neil Horner and Kehinde George of Attride-Stirling &Woloniecki, Bermuda

Contributing Authors’ Biographies:

Bala Nadarajah is Senior Counsel and Head of the Corporate Department at ASW. He is considered a leading voice in insurance law and regulation in Bermuda and is listed among the world’s leading insurance and reinsurance lawyers in the Euromoney Legal Media Group’s Expert Guides. He presently serves as a Director of the Bermuda Monetary Authority; he is a member of the Insurance Advisory Committee and its Insurance regulatory Sub-Committee. Bala was legal adviser to Bermuda’s Ministry of Finance, Registrar of Companies and Insurance, the Bermuda Monetary Authority and Insurance Advisory Committee from 1979 to 1986 during which time he assisted in drafting Bermuda’s insurance regulations and in the consolidation of the Companies Act 1981.

Neil Horner is Senior Corporate Counsel at ASW. He joined the firm in March 2003. Prior to joining the firm he worked in leading firms in London and New York (Neil is qualified in both jurisdictions) and in Frankfurt. Neil specialises in corporate, insurance, reinsurance and commercial law and also has extensive experience working on large commercial and corporate finance transactions with particular emphasis on the insurance, reinsurance and financial services sectors.

Kehinde George is a partner and Head of Insolvency and Corporate Rescue at ASW. She is one of the founding partners of the firm. Prior to the establishment of ASW, Kehinde worked as a corporate lawyer in leading firms in London and for the UK Department of Trade and Industry advising on insolvency law and policy, and gained several years of insolvency and litigation experience in Bermuda. Kehinde specialises in insolvency and corporate rescue, and commercial litigation.

An insurance company, like any other company, is incorporated under and subject to the provisions of the Bermuda Companies Act 1981 ("Companies Act"). Mostly, insurance companies will be established as "exempted" companies and as such exempt from the requirements of the Companies Act that at least 60 per cent of the equity of the company must be owned and controlled by Bermudians. This allows for an exempted company to be 100 per cent foreign owned.

The Insurance Act 1978 (as amended) sets out the legal framework for insurance regulation in Bermuda together with the related regulations, mainly the Insurance Accounts Regulations 1980 and the Insurance Returns and Solvency Regulations 1980. The Regulations deal mostly with the preparation of financial statements and the financial reporting of registered insurers.

The Insurance Act applies to any person carrying on insurance business in or from Bermuda including exempted companies, "local" companies (i.e. Bermudian –controlled insurers), Non-Resident Insurance Undertakings (‘NRIUs’) (which are foreign-owned and foreign-domiciled and sell policies through Bermudian agents on Bermudian lives and property pursuant to the Non Resident Insurance Undertakings Act 1967 (‘NRIU Act’) and overseas companies carrying on non-domestic insurance business in or from a place of business in Bermuda under a permit. This Report focuses primarily on exempted companies.

Significant amendments to the Insurance Act were made by the Insurance Amendment Act 1995, the Insurance Amendment Act 1998 and the Insurance Amendment Act 2001. These are all discussed in this Report.

The Insurance Act applies to any person carrying on insurance business in or from Bermuda and provides for the registration of insurers and insurance managers, brokers, agents and salespersons.

The Segregated Accounts Companies Act 2000 (as amended in 2002) creates a new public registration system for establishing protected client accounts in Bermuda. The effect of the legislation is to permit a segregated accounts company to operate segregated accounts or cells which benefit from a statutory division or firewall so that the assets of one account are protected from the liabilities of another or of the company’s general account. Although it is true that the protected cell concept has not been tested in any of the jurisdictions in which such cells operate, it is instructive to reflect that the core doctrine of separate corporate personality was only endorsed by the UK courts in 1897 with the landmark case of Salomon v Salomon!

There have been two particularly significant regulatory issues/developments in Bermuda in the past year or so impacting both on general and life insurers. A particularly important development was the amendment of the Insurance Act in October 2001 and January 2002 to devolve responsibility over the insurance industry from the Minister of Finance to the Bermuda Monetary Authority (the "Authority"). This was in response to a report produced by KPMG in 2001 on the financial regulation of Caribbean Overseas Territories and Bermuda which had recommended that the insurance regulator should be politically independent of government. Although there has inevitably been some element of bedding-down, the transfer to the Authority has been smooth and reflects the importance attached by all in the insurance industry in Bermuda in maintaining the highest standard of regulation. In this regard, a significant regulatory issue facing insurers in Bermuda is to continue to further develop and enhance effective anti-money laundering strategies (in conjunction and consultation with the Bermuda National Anti-Money Laundering Committee and overseas regulators) taking into account the changed international landscape and the introduction of such measures as the USA Patriot Act 2001 which applies to general and life insurance companies incorporated in Bermuda.

The Insurance Act provides that no person may engage in insurance business in or from within Bermuda unless such person is registered as an insurer under the Insurance Act 1978.

The term "insurance business" is defined to mean the business of effecting and carrying out contracts (a) protecting persons against loss or liability to loss in respect of risks to which such persons may be exposed; or (b) to pay a sum of money or render money’s worth upon the happening of an event, and includes reinsurance business (emphasis added). The definition was deliberately wide to provide maximum scope for industry expansion and product development. A significant feature of the Insurance Act is that the framers of the Insurance Act decided to regulate reinsurance companies in the same way as insurance companies.

The Insurance Act distinguishes between "long-term business" and "general business". General business is any business which is not long-term business. The Insurance Amendment Act 1995 introduced a multi-licensing system of classifying "general" business in recognition of the diversity and volume of business carried on by insurers in Bermuda. Accordingly, insurance companies are divided into four Classes comprising Class 1 "pure captive" insurers (writing the risks of parents and affiliates only), Class 2 insurers (multi-owner captives and single parent captives writing no more than 20 per cent unrelated risk), Class 3 insurers (being insurers and reinsurers not included in any of the other Classes including finite reinsurers and captives writing more than 20 per cent unrelated risk) and Class 4 reinsurers (such as ACE and XL) who write direct excess liability and/or property catastrophe reinsurance risks.

The Insurance Amendment Act 1998 was introduced amongst other things to recognise the convergence of the insurance and capital markets and permits the Authority to recognise certain contracts (including insurance derivative contracts) as "designated investment contracts" the entry into which does not constitute the carrying on of insurance business.

In relation to the question whether the requirement for authorization is dependent on the insurance being written in Bermuda or the insured risk being situated in Bermuda, we would note that both types of risk are covered. In particular, we would comment that the latter category is generally designated as "domestic risk" and the direct coverage of such risks can only be undertaken by "local" insurers or NRIUs which have been given approval under the NRIU Act¹ to write such business in Bermuda.

Since the transfer of responsibility referred to in A.1, the Authority has become the single independent regulator for all Bermudian financial services industries and as well as dealing with registration is responsible for compliance and enforcement of the provisions of the Insurance Act.

The Insurance Act entrusts the Authority with broad powers of enforcement. For example, it may require that an insurer not write insurance contracts generally or particular types of insurance contract or that an insurer limit the aggregate of premiums to be written by it during a specified period. It may also require an insurer not to declare or pay dividends or distributions or limit the amount of such payments as the Authority thinks appropriate. The Authority may prevent the insurer from entering into any specified transaction with any specified person and generally require such financial information relating to the insurer as the Authority thinks necessary. In addition to these (and other powers) the Authority may cancel the insurer’s registration.

The Insurance Act permits the Authority to intervene where the business of the insurer is being so conducted that there is a significant risk of the insurer becoming insolvent or where the insurer is in breach of the Insurance Act or the terms of its licence. In addition where it appears to the Authority that there is a significant risk of the insurer becoming insolvent, the Authority may direct the insurer to maintain in, or transfer to and keep in the custody of a specified bank, assets of the insurer of such value and description as it thinks necessary.

The Authority is likely to so intervene for example where an insurer has failed to meet a solvency margin or minimum liquidity ratio or where the insurer’s total statutory capital and surplus has diminished to an extent the Authority considers

unacceptable. The Insurance Act vests in the Supervisor of Insurance the power to wind up any insurance company or reinsurance company not only if the company is unable to pay its debts but also if the company fails to meet any of its obligations under the Insurance Act or Regulations. The recent Insurance Amendment Act 2002 has expanded the powers of the Authority to require an insurer to provide such information as it requires in relation to matters that are likely to be material in the performance of its functions under the Insurance Act or require an insurer to provide it with copies of published or unpublished reports containing such information. A person is not required to disclose or produce information where such information is protected by legal professional privilege.

4. Is reinsurance regulated in your jurisdiction?

Bermuda has generally regulated reinsurance companies in the same way as insurance companies from the inception of the Insurance Act and accordingly reinsurance companies were expressly included as coming within the scope of insurance business under the Insurance Act.

The regulatory regime in Bermuda does prescribe certain minimum capital and surplus requirements for insurance companies, which vary depending on the particular class of the insurance company in question as set out below:

Class 1 – US $120,000

Class 2 – US $250,000

Class 3 - US $1 million

Class 4 - US $100 million

These are the minimum standards required and may need to be adjusted upwards depending on the actual net written premium of the insurer. Classes 1, 2 and 3 must maintain a solvency margin (i.e capital and surplus) of 20 per cent of net premiums for the first US $6 million of premiums written. If premiums are written above this amount, the solvency margin is US $1.2 million plus 10 per cent of the excess for Classes 1 and 2. For Class 3, the amount is 15 per cent of the excess above US $6 million. Class 4 insurers must maintain a solvency margin of 50 per cent of net premiums written.

If the relevant percentage of the loss and loss expense provision of an insurer is greater than the solvency margin described above, the insurer must have a higher level of statutory capital which is the greater of the relevant solvency margin or the relevant percentage of the loss and expense provision. The loss percentage percentages are 10 per cent for Classes 1 and 2 and 15 per cent for Classes 3 and 4.

The minimum paid up share capital for long-term business is US $250,000 and for composite insurers (who write both general (Classes 1, 2 and 3) business and long-term business) is US $370,000. A Class 4 insurer that writes long-term business must have a minimum paid up share capital of $1,250,000. A composite insurer must also satisfy the required solvency margins for long-term business set out above.

The solvency capital requirements must be maintained by the insurer at all times, this being a standard condition imposed on the registration of every insurer.

The solvency margin position is summarized in the table below:-

All Bermuda insurers are subject to continuing financial reporting requirements which vary by category and class of licence. Penalty fines may be incurred if filings are not made as required.

Every insurer must prepare Statutory Financial Statements in respect of its insurance business for each financial year and retain a copy thereof and the auditor’s report thereon in its principal office.

Class 1 insurers must file with the Authority within 6 months of the financial year end (extendable to 9 months on application) a Statutory Financial Return comprising the auditor’s report on the statutory financial statement, a declaration of solvency ratios and, if there has been a discounting of loss reserves, an opinion from a loss reserve specialist (eg casualty actuary) where compliance is not possible on an undiscounted basis. Statutory Financial Statements are not required to be filed but must be maintained by the Class 1 insurer at its principal office for a period of 5 years. The reporting requirements are identical for Class 2 insurers save that they must also file the Statutory Financial Statements with the Authority within 6 months of the financial year end and every third year include an opinion from a loss reserve specialist as to the adequacy of their loss reserves. Class 3 insurers must provide identical information to that provided by Class 2 insurers although the loss reserve specialist opinion must be provided annually and the Statutory Financial Statements must be filed within 4 months of the financial year end (extendable to 7 months). Class 4 insurers are subject to identical requirements as a Class 3 insurer except that a schedule of ceded reinsurance must also be prepared containing the required information. Long-term insurers must also file Statutory Financial Statements and a Statutory Return within 4 months of the financial year-end. In addition, a long-term insurer must also file a certificate prepared by the company’s approved life actuary.

The information required by the Insurance Act is intended to give an early warning to any person examining the statement of any financial or operational difficulties that face or may face the insurer and enables the Authority to take such action as may be necessary to safeguard any public interest involved.

As referred to in A.3 above, the Authority now has enhanced powers to obtain such additional information and reports (including the production of unaudited management financial reports) as it thinks necessary.

An important facet of the Bermuda insurance market place is that the Bermuda market mostly comprises captive insurance companies and reinsurance companies. Bermuda law contains a variety of operational and organisational requirements appropriate to this environment. In addition to the various external controls required by the Authority and Bermuda law (the Authority must approve the shareholders of the insurer and under the Exchange Control Act 1972 all issues and transfers of shares must be approved), a key feature of the Insurance Act is that every insurer is required to maintain a principal office in Bermuda and to have a principal representative in Bermuda (generally this will be the insurer’s insurance manager) who is knowledgeable in insurance and who must also be approved by the Authority.

The principal representative of the insurer is under a statutory duty to maintain and retain custody of the statutory accounting records and to make the statutory annual return. In addition, the principal representative must inform the Authority (within 30 days) if he or she concludes that the insurer is likely to become insolvent or ascertains or has reason to believe that the insurer has failed to satisfy its solvency margin or certain other matters prescribed in the Insurance Act.

Although the Bermuda Insurance Act is conceptually similar to the UK regime, a key difference is that insurers in Bermuda may engage in other commercial activities and engage in so-called transformer activities permitting them to write a risk as an insurance policy in one case and as a financial contract in another. The Insurance Amendment Act 1978 permits parties to enter into "designated investment contracts" (including derivatives and swap contracts) which are statutorily deemed not to be insurance business.

The Insurance Act permits an insurer to conduct both general and long-term business (which includes life-insurance business) as a composite insurer. A composite will generally comply with the Insurance Act as if the two types of business were underwritten by two separate companies (long-term business must be maintained in a separate account and a life actuary must be appointed in respect of this business) though one set of statutory financial statements will be prepared.

It is a requirement of Bermuda law that the Authority consent to the intended ownership of all proposed companies (including insurance companies) and it is necessary to submit certain prescribed information on each of the legal, intermediate and ultimate beneficial owners, details of which are confidential. If any of these parties is a company, audited financial statements, annual reports or (if audited financial statements are unavailable, unaudited financial statements) shall be made available to the Authority for each company. If the owner is an individual, a Personal Declaration and statements of net worth shall be supplied to the Authority unless such owner is already sufficiently well known to the Authority.

In the case of insurance companies, the Authority will also require evidence that the management and staff have the requisite expertise to run the insurer and implement the business plan (which will form part of the application package together with proforma actuarial evaluations testing inter alia the adequacy of reserves, solvency margins and liquidity ratios).

In determining whether of not to register an insurer, the Authority will rely heavily upon the recommendation of the Insurers Admissions Committee, a sub-committee of the Insurance Advisory Committee (the statutory body created by the Insurance Act to advise on any matter connected with the Authority’s discharge of its functions under the Insurance Act and staffed mainly of insurance and reinsurance professionals). The Committee will review in detail the Pre-Incorporation Information form, financial projections, business plan and related documentation.

The law regarding the priority of payment of preferential debts in a liquidation has recently been amended by the Employment Act 2000, section 33. Previously, certain employee benefits (including wages, holiday entitlement and pensions), up to specified maximum amounts, ranked as preferential debts after the expenses of the liquidation, government taxes and municipal rates. Section 33 provides that the claim of an employee to wages and other payments due under his contract or under the Employment Act (without limitation on amount) shall have priority over all other creditors, including the Crown. Claims under the Employment Act include severance pay, redundancy payments and compensation for unfair dismissal. Given the compensation packages of senior executives in some companies, this change could have a significant impact on the monies available to meet unsecured claims in some insolvencies. Employee claims (and other preferential claims) do not have priority over secured creditors who have fixed security over assets of the company.

Under section 33, in a voluntary liquidation, employee claims continue to rank after the expenses of the liquidation. However, due to an anomaly in the drafting of the section, in a winding up by the court (compulsory liquidation), employee claims now rank ahead of the expenses of the liquidation. It is expected that this anomaly will be corrected in the new legislation referred to below, if not before. This change in priority does not have an impact on the insured party in particular, but makes the regime less favourable to all unsecured creditors.

Bermuda's corporate insolvency legislation is based upon the UK Companies Act 1948 and Companies (Winding-Up) Rules 1949. Bermuda has conducted a review of its corporate insolvency legislation and rules and new legislation to update the provisions is in the process of being drafted. The new legislation will be based primarily on the provisions of the UK Insolvency Act 1986 and Insolvency Rules 1986 so far as they relate to companies. The changes will be significant in that they will bring about an overhaul and updating of the current system, and will also introduce new insolvency procedures such as administration; although no decision has been taken as to whether administration will be available to insurance companies. As currently proposed, the new legislation will not change the status of the insured party in the Bermudian insolvency regime. It is unlikely that Bermuda will adopt the recent change to UK insolvency law, implementing the EC Directive on Reorganisation and Winding-up of Insurance Undertakings, which gives direct insurance creditors priority over nearly all other creditors. It is not anticipated that the new legislation will be ready within the next 12 months.

Bermuda does not have such a scheme.

Bermuda does not have such a scheme. Insurance and reinsurance contracts often provide for disputes to be resolved by arbitration rather than litigation, but this is a matter of choice for the parties. Arbitration is the preferred method of dispute resolution in reinsurance contracts in Bermuda.

¹ ^{These are few NRIUs in existence and a moratorium is presently in place in respect of granting additional entities the status of NRIU.}