Bala Nadarajah and Neil Horner outline the history and development of insurance regulation in Bermuda.

It is a truism - however trite - to say that the phrase 'flexible yet responsible legislation' most aptly describes the regulation of the insurance industry in Bermuda. It is this approach (most recently demonstrated by the recent enactment of the Segregated Account Companies Act 2000, as amended in 2002) which has served Bermuda well, enabling the island to become a leading player on the world's offshore insurance market stage, ranking alongside New York and Lloyd's as one of the largest insurance and reinsurance centres in the world.

The Bermuda insurance industry has its origins in the late 1940s, but only started to develop rapidly after Fred Reiss devised the captive in the 1960s. The captive concept was the first truly Bermudian insurance product and, perhaps the world's first alternative risk product. At that time it is fair to say that regulation of the insurance industry in Bermuda was the responsibility of ad hoc committees, with an absence of any schematic body of law and regulation. However, in step with the quickening pace of growth of the captives market and the Bermuda insurance industry, it was soon recognised that effective regulation was a pre-requisite to sustain and nurture the growth of the insurance industry in Bermuda.

Legal introduction
So the Insurance Act was introduced in 1978 and related regulations (chiefly the Insurance Account Regulations and the Insurance Returns and Solvency Regulations) followed shortly after, in 1980.

The Insurance Act applies to any person carrying on 'insurance business' in or from within Bermuda, and provides for the registration of all insurers and insurance managers, brokers, agents and sales persons. The definition of 'insurance business' was (quite deliberately) cast in very broad terms to offer the maximum scope for industry expansion and product development.

An interesting feature of the Insurance Act was that the architects of the legislation (having consulted with the insurance industry in Bermuda) decided to regulate reinsurance companies in the same way as insurance companies. It is only now, in the wake of the tragedy of September 11 and the well-documented troubles of several large European reinsurers, that the regulators in Europe are proposing to introduce a system of insurance regulation for European reinsurers which will come into effect during 2005/2006.

Generally, the Insurance Act is conceptually similar to the UK regime, dividing insurance business into long-term business and general business. A significant difference is that insurers in Bermuda may engage in other commercial activities and therefore carry on so-called transformer activities, allowing them to write a risk as an insurance policy in one case and as a financial contract in another. The Insurance Amendment Act 1998 permits parties to enter into certain 'designated investment contracts' (including derivatives contracts and swaps) which are statutorily deemed not to be insurance business.

Key features
An important feature of the Insurance Act was the creation of the Insurance Advisory Committee (IAC), a statutory body tasked with the duty to advise the Minister of Finance (and, since 2001, the Bermuda Monetary Authority) on any matter connected with the Authority's discharge of its functions under the legislation. It is also responsible for advising on any matter, including proposed legislative changes relating to the development of the insurance industry in Bermuda. The IAC has several sub-committees, the most significant of which is the Admissions Committee staffed mainly by re/insurance professionals with the necessary experience to evaluate applicants who wish to enter the Bermuda insurance market. The work of the IAC has been critical in maintaining the pristine integrity of the insurance marketplace.

A key development was the introduction in the Insurance Amendment Act 1995 of a multi-licensing system of classifying 'general business' to reflect the diversity and volume of business carried on by insurers in Bermuda. Accordingly, insurance companies are divided into four classes: Class 1 'pure captive' insurers (writing the risks of its parent and affiliates only), Class 2 insurers (multi-owner captives and single parent captives writing no more than 20% unrelated risk); Class 3 insurers (insurers and reinsurers not included in any of the other classes including finite reinsurers and captives writing more than 20% unrelated risks; and Class 4 insurers and reinsurers (such as XL and ACE) which write direct excess liability and/or property catastrophe reinsurance risks.

This multi-licensing system permits a graduated approach to the regulation of insurance companies. The various minimum capital and solvency thresholds are - as would be expected - significantly higher for Class 4 insurance and reinsurance companies than for Class 1 captives ($100m for Class 4 insurers as opposed to $120,000 for Class 1 companies). Likewise, although all Bermuda insurers are subject to continuing financial reporting requirements, these vary from class to class, and again Class 1 insurers bear the lightest regulatory burden.

A further important development was the amendment of the Insurance Act in 2001 to devolve responsibility over the insurance industry from the Minister of Finance to the Bermuda Monetary Authority (BMA). This was in response to a report produced by KMPG on the financial regulation of Caribbean Overseas Territories and Bermuda (submitted to the UK Parliament in 2001). The report had referred to an apparent weakness it identified, that the ultimate insurance regulator (the Minister of Finance) was not politically independent of the government. The speed of Bermuda's response to the report indicates the importance attached by all involved in the insurance industry to maintaining the highest standards of regulation.

In conclusion
This article began by highlighting the significance of the phrase 'flexible yet responsible legislation' when describing the regulation of the insurance industry in Bermuda. It is perhaps appropriate to refer in conclusion to the recent amendments (introduced in 2002) to the Segregated Accounts Companies Act 2000. This legislation establishes a new public registration system for establishing protected client cells. This can be accomplished quickly and inexpensively. It is perhaps the most sophisticated cell company legislation enacted anywhere in the world, which is appropriate in view of the fact that Bermuda devised the segregated account concept introduced in the early 1990s by way of separate private acts for companies that required statutorily insulated accounts.

The effect of the legislation is to permit a segregated accounts company to operate segregated accounts with a statutory 'firewall' between them. Although it is true to say that the concept has never been tested in the courts, it is perhaps instructive to reflect that the doctrine of separate corporate personality (established in the landmark case of Salomon v Salomon) was decided upon by the courts in 1897. The amended legislation in Bermuda reflects the island's determination to be in the vanguard of facilitative but responsible development in this area.

By Bala Nadarajah and Neil Horner

Bala Nadarajah is senior counsel and head of the corporate department at Bermuda law firm Attride-Stirling & Woloniecki. Neil Horner is senior counsel at Attride-Stirling & Woloniecki.