New market entrants, the return of traditional market players, and changing regulations once again have the world's insurance providers' eyes set on Bermuda. Appleby partner Brad Adderley has both the corporate expertise and the insurance knowledge needed to handle the complex issues associated with insurers and reinsurers in the region. Expert Guides editor Chris Allen spoke to Adderley about the role Bermuda has played and is likely to play in the global insurance industry:
Much of Latin America is booming in terms of regional and foreign investment. Does any of that activity have an effect on Bermuda's economy, specifically as relates to the insurance market? Yes it does. What we've seen is, and Bermuda as a jurisdiction has really been pushing this, experts from Bermuda working with local on-the-ground specialists, to develop the knowledge and understanding of the insurance/reinsurance industry in the Latin American market, and to help facilitate long-term business in Latin America.
Over the last eight years we've started to see major Latin American companies and organisations forming new insurance/reinsurance companies every year. Recently it's been as many as two a month. An increasing number of Bermuda-based insurance managers are now regularly flying down to Latin America to give presentations at conferences and to undertake business development across the region. We also have the Bermuda Captive Conference, where there is an entire Latin America section, complete with presentations tailored to various Latin American jurisdictions and types of companies, with Spanish and Portuguese translations of the content. It really offers every piece of information interested Latin American parties would need.
Other conferences being held with Bermuda ties are now including a LatAm element â€"just recently, the yearly World Captive Forum, last held in Miami, also had extensive coverage of the LatAm potential, as the amount of interest from Latin America in recent years has been quite high. The learning curve is steep but, lately, we've seen increased interest by major Latin American organisations (some of them classified as "Multi-Latinas" or those large entities encompassing interests in several different countries) actually forming new reinsurance companies in Bermuda.
With regard to the above, have you started to see more activity from some of the emerging Latin American markets at your firm or in your insurance practice? Appleby has seen more than its fair share of work in this field, from day one, thanks to our Spanish and Portuguese-speaking lawyers and other professionals who not only speak those languages, but also understand the business culture of those countries, so we're excited that the Latin American market is now developing at such a fast pace. I'm a partner in the corporate department specialising in insurance, and we're definitely seeing more interest and more insurance/reinsurance companies being formed. The education process of the past years has been key and is now definitely paying off.
We've seen a more interest on the non-insurance side, too, but it is on the insurance side that it's been particularly active. There has been a direct flight from Bermuda to Miami since 2005, which really helps as well. A direct flight seems like a small thing, but it really does help.
The captives market seems to be as active as it has ever been. Given the number of insurance companies domiciled in Bermuda, have you seen an increased interest in the formation of captives in recent years? I think what we're seeing is an increase of interest in Bermuda, especially as a result of regions like Latin America becoming more mature, more knowledgeable, and wanting to have captives where they didn't before. More and more of those 'non-traditional' markets have been increasing their interest in forming captives.
If you look at the number I gave you earlier [approximately two new insurance company formations per month], you might form 18 to 24 new captives in a year from Latin America, which is a lot for any jurisdiction. That number alone demonstrates the importance of captives and the Latin America region to Bermuda.
A lot of what you see in the media is about increasing regulation for large commercial carriers - people who write more complex business have more risk and therefore more regulation - but you haven't seen that much increase in regulation of small companies or captives.
People who aren't writing complex business should have less regulation because their business is simpler and easier to understand. I think that's one of the factors driving interest in captives.
As Europe wrestles with Solvency II and other parts of the world continue to look at prudential requirements, do you see captives becoming even more popular? I think it's definitely possible. This touches on my last answer, but I think that captives worldwide are becoming more popular for jurisdictions that have never had captives before.
I think there will be an increase in people looking for captives because of the capital requirements of Solvency II, though. For Bermuda, I think it will come down to whether it will be able to get captives that are not regulated by Solvency II. Bermuda, for instance, could be Solvency II equivalent for complex companies, but for the rest of the simpler companies they wouldn't fall under Solvency II.
The real question is that, if you're a European company seeking reinsurance and you're forming your own company in a non-Solvency IIequivalent jurisdiction, either on purpose or because you have to, how does that affect the treatment you'll get concerning your reinsurance coverage? There's an extent, too, to which lawyers in Bermuda are really waiting to see where Solvency II ends up. Right now the only thing that makes sense is for Bermuda as a jurisdiction is to maintain the existing level of resolution. Bermuda has a large, vibrant and very well-regulated reinsurance market that no other offshore jurisdiction has, that's why Bermuda is treated differently.
For people not familiar with the term, can you expand a little bit on both the nature and the practical applications of so-called 'rent-acaptive' companies? This ties back to Latin America in some respects. Basically, as a company you need to have a certain size of premium to form a captive. Those companies who want a captive but can't justify the expense, what do they do? They put the business in a segregated account of a rent-a-captive, an insurance company formed and licensed in Bermuda, normally by an insurance manager, that allows the client to rent that company's license and expertise. The business is placed in a segregated account within the rent-a-captive company. This ensures that the liabilities of one program are firewalled from the assets and liabilities of other segregated accounts and the general account of the company. That company will charge a fee for writing the business. You get the benefit to your program, and you get to grow your business and learn how the insurance program works. As you grow the business, the manager will tell you, 'Let's move the business into its own account and form your own company,' which that manager will often then manage.
The idea is that you're renting someone's insurance company, license, and knowledge, and your business will be fully funded from that segregated account. The segregated account cannot go insolvent because it's capitalised to the point that it can meet the maximum liabilities. That's why the insurance company you're renting from doesn't mind, they feel comfortable. The client feels comfortable because the assets are there to satisfy all liabilities.
It's a great way for Latin American companies (especially smaller companies), for instance, to learn about the program and to learn about Bermuda as they grow the program to the point that it becomes justifiable to have their own insurance company or captive. It reduces costs since you're just paying a fee, and the manager might have 15 or 20 such programs, so the costs are shared.
The most important thing is making sure you understand how you can leave the rent-a-captive company. It can be difficult to leave, but if you're going to form a new company with the existing manager, then they might be more amenable to you exiting the rent-a-captive.
Could you describe a little of your work with and Bermuda's expanding market for catastrophe bonds? This is a huge hot topic in Bermuda. Bermuda has been trying to grow its 'cat bond' market because the 'mousetrap' that we had 12 years ago wasn't as efficient as in other jurisdictions, especially the Cayman Islands, then subsequently in Ireland. We, as a jurisdiction, were willing to have all of the other work in the world but we didn't pay as much attention as we should have to cat bonds.
We've come up with a new mousetrap called 'special purpose insurers' which has created an efficient, sensible, regulated vehicle for cat bonds to such a degree that: one, our aim is to ensure all Bermuda sponsors who use or issue cat bonds use Bermuda; two, that sponsors who had previously used Ireland move to Bermuda; and, three, that all new issuance - new market players in cat bonds - that Bermuda gets a fair share of those. You have to understand, Bermuda's market share in cat bonds three years ago was zero, and it's grown substantially since then. I don't think we'll ever take all of Cayman's business, but I think this type of business will grow in Bermuda to be a significant player in this space. Last year Bermuda formed 55 insurance companies. Out of that 55, probably 30 were licensed as special purpose insurers that might be writing cat bonds, insurance linked securities, sidecars, or fully collateralized reinsurance transactions.
As a result of this, we're forming and holding the first ever conference in Bermuda related to insurance linked securities in November. When you think about it, the sponsors of these transactions, the investors, the people buying reinsurance from these people are all in Bermuda, so it's easier for someone to justify one trip to Bermuda over one to other jurisdictions. It's almost a self-fulfilling prophecy - the more market services we can provide here, the more business will come.
Lastly, has the emergence of a growing number of so-called 'offshore' jurisdictions and the re-emergence of places like Panama impacted Bermuda's insurance landscape? I don't pretend to be an expert in every offshore jurisdiction, but what I can say is that Bermuda has been the largest offshore captive domicile jurisdiction since the beginning, so I don't think it's really threatened by the existence of other offshore jurisdictions.
In another sense, Bermuda doesn't compete directly with every offshore jurisdiction. There aren't many jurisdictions with the expertise that we have worldwide. When companies come here, they're getting all of the services they need in one area, plus they are able to purchase their reinsurance here, too. We're saving them money, we're saving them time, and we're saving them flights by offering everything they need in one spot. But do we sometimes compete with new or cheaper sites, potentially? Probably. But Bermuda has never been a mass market - we want the quality companies who want sensible, effective regulation. If you want to go to a jurisdiction where there's no regulation, then Bermuda probably isn't the jurisdiction for you. Also, if you're looking to form an insurance company of a really small size, you'd probably want to look elsewhere, too. That's not to sound overly proud, it just doesn't make sense from a cost perspective to form really small insurance companies here. I think the general rule of thumb here is that, for a captive, you need to have a million dollars in net premium.
At the end of the day, people usually look to Bermuda as a place of innovation and, at the same time, to form safe, stable, effectively and efficiently regulated insurance businesses. That's what this jurisdiction has been since the beginning, and I think that's what it will always be.
Previously published in Expert Guides, May 2013
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