Bermuda: An introduction to insurance

Beginning in the late 1960s and early 1970s and driven by rising insurance premiums and diminishing property and casualty coverage, Bermuda emerged as the domicile of choice for the majority of the world's captive industry. A captive insurance company (also known as limited-purpose insurer) is a self-insurance vehicle set up to insure the risks of its parent(s) and/or the affiliates of its parent(s).

At the time, captive owners (and their advisers) were attracted by Bermuda's economic, social and political stability, strong infrastructure, proximity to North America and a legal system that followed English common law, which provided for an ultimate right of appeal to the Privy Council in the United Kingdom.

The Bermuda insurance marketplace has continued to evolve (due in part to its skilled and innovative workforce and the pragmatic approach of its insurance regulator), so that Bermuda now boasts an established captive industry and is home to over 30 major international commercial (re)insurance companies. Bermuda is also the pre-eminent market for ILS (insurance-linked securities) products, which has been propelled by the convergence of the insurance and capital markets and which remains at the forefront of innovation in the insurance marketplace today.

The primary statute governing insurance-related activities in Bermuda is the Insurance Act 1978 (Insurance Act) which applies to any person carrying on insurance business in or from within Bermuda, including insurance intermediaries (such as managers, brokers, agents and salesmen), as well as insurers and reinsurers. The Bermuda Monetary Authority (BMA) is Bermuda's insurance regulator.

Over the years, Bermuda has adopted a risk-based approach to regulation, incorporating the core principles promulgated by the International Association of Insurance Supervisors (which provides for greater oversight of companies with riskier profiles) and regulations applicable to commercial insurers pursuant to the European Union's Solvency II Directive. Bermuda's commercial insurance framework has been determined by the European Commission to be fully equivalent with the regulatory standards applied under Solvency II which means that Bermuda's commercial insurers and reinsurers may conduct business in Europe as though they are EU-domiciled entities. Furthermore, since 1 January 2015, the National Association of Insurance Commissioners (NAIC) – being the US standard-setting and regulatory support organisation created and governed by the USA's chief insurance regulator – has listed Bermuda on its list of 'qualified jurisdictions'. This means Bermuda-domiciled commercial (re)insurers are eligible for reduced (re)insurance collateral requirements under the NAIC's Credit for Reinsurance Model Law and Regulations. In addition, and effective 1 January 2020, Bermuda has reciprocal jurisdiction status, meaning that Bermuda's (re)insurers are regulated based on their individual risk-based profile.

The regulatory requirements applicable to Bermuda (re)insurers will depend on the class of (re)insurer. Such classification is based on the BMA's assessment of the nature, scale and complexity of the (re)insurer's operations; in particular, whether the classification should be that of a commercial insurer (conducting general or long-term insurance business), a limited-purpose insurer (which includes captive insurers, special-purpose insurers (SPIs) and collateralised insurers), or an innovative insurer.

For registration purposes, Class 3A, Class 3B and Class 4 commercial licences are granted to companies carrying on general insurance business and Class C, Class D and Class E commercial licences are granted to companies carrying on long-term insurance business.

Generally, a company is registrable as a Class 3A insurer if net premiums written (50% of which must derive from non-related business) are less than USD50 million and as a Class 3B if they are not. A Class 4 insurer must maintain total statutory capital and surplus of at least USD100 million and carry on excess liability or property catastrophe business (and not otherwise be registrable as a Class 1 or Class 2 insurer).

A long-term insurer will be classified as a Class C insurer if its total assets are less than USD250 million, as a Class D insurer if its assets are between USD250 million and USD500 million and as a Class E if its assets are greater than USD500 million.

All commercial insurers are subject to enhanced capital and reporting requirements.

As for the limited-purpose classifications, a single-parent captive will be registered as a Class 1 insurer if it writes general insurance business and as a Class A insurer if it writes long-term insurance business. A multi-parent captive (such as rent-a-captives, segregated accounts (protected cell) companies, and P&I and mutual insurers) will be registered as either a Class 2 or Class 3 insurer if it writes general business and as a Class B insurer if it writes long-term business.

An SPI is a fully collateralised vehicle, most often used for ILS transactions. Applicable insurance regulation is minimal.

Similar to SPIs, collateralised insurers (which are also required to fully collateralise liabilities) are used for more complex ILS transactions and as a result attract a greater degree of supervision and regulation.

Insurers and insurance intermediaries carrying on business in an innovative way may apply for an innovative insurance licence.

Insurers carrying on insurance business in an innovative way may apply for either a Class IGB licence (if the company is carrying on general business) or a Class ILT licence (if the company is carrying on long-term business). Both IGB and ILT classifications allow companies to experiment with new technologies and/or provide innovative products to a limited number of policyholders for a limited period of time. The company will be placed in a regulatory sandbox, while the BMA assesses the conditions of the company's proof of concept and the appropriate regulatory requirements going forward. Once the insurer successfully demonstrates the feasibility of its business model, it may apply for a regular insurance licence.

The IIGB class, on the other hand, is a non-sandbox class of innovative insurer and is primarily designed for insurance business models involving the use of digital assets.

With respect to current trends in the Bermuda insurance market:

• The BMA announced that it will not object to BMA-supervised entities (including insurance companies) conducting business with a licensed cannabis cultivator, processor or seller; provided that the conduct of such business would not be contrary to any offences that may be provided for in the laws of a foreign jurisdiction which amount to criminal conduct. It is important to note that the cannabis activity must be legal at all levels in the foreign jurisdiction.
• Cyber perils continue to be of concern to companies globally. In October 2020, the BMA introduced the Insurance Sector Operational Cyber Risk Management Code of Conduct which applies to all registered insurers. This Code is designed to promote the stable and secure management of information systems.
• In November 2019, Bermuda enacted the Incorporated Segregated Accounts Companies Act (ISAC Act) which permits a company to create an unlimited number of incorporated segregated accounts with separate legal personality (a facet that is not previously available under the existing Segregated Accounts Companies Act 2000 (SAC Act)). The corporate nature of each segregated account would permit one segregated account to hold an insurance licence and another could be registered as an investment fund. While it is too early to determine whether such hybrid structures will become a popular option or supplant the existing SAC regime, it does enhance the options available to insurance companies that wish to operate segregated accounts.

An original version of this article was first published by Chamber and Partners, February 2022.