There is no single reason why Bermuda is the jurisdiction of choice for start-up reinsurers, but a key factor is its responsible yet facilitative regulation, say Neil Horner and Rod Attride-Stirling
The Bermuda Class of 2005, which has emerged in the wake of Hurricanes Katrina and Rita has demonstrated yet again that Bermuda is the place to establish new reinsurance carriers in a capacity crunch.
The speed and efficiency of the incorporation process for insurance and reinsurance companies in Bermuda is an attractive feature. Bermuda has become one of the largest reinsurance markets in the world, such that not only new start-ups see Bermuda as the place to incorporate, but also large existing insurers outside of Bermuda see it as an essential place to be.
Witness the new Bermuda start-ups from the London market. Not only is Bermuda seen as a quality insurance marketplace, but with its long history in this market, it has evolved sophisticated management, accounting and legal firms with extensive expertise in reinsurance law and practice.
Further, the courts have kept pace with market developments, with the recent addition of a commercial court with judges with extensive private practice reinsurance experience. The right of appeal to the Privy Council in England remains a part of this structure. Other attractive features include Bermuda's stable political and economic climate and high standard of living.
As has also happened in the UK, Bermuda has in recent years moved to a single regulator, the Bermuda Monetary Authority (BMA), which has sole responsibility for all the constituent parts of the Bermudan financial services industry, including the insurance and reinsurance industries.
The BMA appoints a Supervisor of Insurance to assist with the day-to-day running of the reinsurance industryand to sit as an ex officio member of the board of directors of the BMA. The BMA is also assisted by the Insurance Advisory Committee, which comprises "persons appearing to the BMA to be knowledgeable about insurance business in Bermuda". Bermuda also imposes a statutory requirement that every reinsurer must appoint a "principal representative" resident in Bermuda and maintain a principal office in Bermuda. The principal representative must be knowledgeable about insurance and is frequently a Bermuda-registered insurance management company. The principal representative is responsible for making the annual financial filings which reinsurers are required to make. Generally, the principal representative additionally fulfils an "early warning" role and has a statutory duty to report if, for example, there is a likelihood of the reinsurer becoming insolvent or where there is a failure to comply with any of the minimum solvency margins.
The Bermuda market has traditionally been characterised by a co-operative approach between all involved in the industry but the BMA of course has overall responsibility to ensure that the regulatory system commands the confidence of all. The BMA has recently published a series of guidance notes providing direction to those involved in the industry (including what is expected of the principal representative and the company's auditor) as well as setting out principles of corporate governance.
COMPLYING WITH BERMUDA LAW
The primary legislation applicable to the reinsurers in Bermuda is the Insurance Act 1978 (as amended). The core principle of the Insurance Act is that all these carrying out insurance businesses "in or from within Bermuda" must be licensed. The Insurance Act defines the term "insurance business" in very broad terms. It 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".
It is an important feature of the Insurance Act that the legislation in Bermuda should apply to Bermuda reinsurers in much the same way as it applies to insurers. It was a deliberate decision by the Bermuda regulators to bring reinsurers within the panoply of the insurance regulatory and supervisory framework.
Conceptually, the scheme of the Insurance Act differentiates between general and long-term business. General business is any business that is not long-term business while long-term business includes life, annuity and pensions business and accident and health business where the underlying contracts are expressed to be in effect for a period of not less than five years. It is possible to conduct both general and long-term business as a composite insurer.
It is a core principle that any company carrying on insurance or reinsurance business "in or from within Bermuda" must be registered under the Insurance Act. That is a very similar concept to the UK requirement that an insurer or reinsurer must be authorised under Financial Services and Markets Act 2000 (FSMA 2000) as a reinsurer will be carrying on a "regulated activity" (within section 19 of FSMA 2000). It is a criminal offence for a Bermuda reinsurer to conduct unauthorised business in or from within Bermuda.
Bermuda statute law (section 46 of the Insurance Act) provides that no contract arising from unauthorised business will be void. The Bermuda courts have held that enforcement of section 46 of the Insurance Act is a matter of Bermuda public policy in respect of the essential insurance interests of the community.
LICENSING AND CLASSIFICATION
Bermuda has (since 1995) adopted a multi-class licensing system, which divides all insurers and reinsurers into four classes ranging from Class 1 "pure captives" to Class 4 excess liability or property catastrophe reinsurers. This classification system permits a graduated approach to be adopted towards the regulation of reinsurers so that more exacting solvency and reporting requirements must be satisfied by Class 4 property/casualty reinsurers than by Class 1 pure captives. Accordingly, Class 4 reinsurers must maintain a minimum strategy capital and surplus of $100m.
By contrast, we would note that within the EU there is a movement away from fixed minimum solvency limits towards a more risk-based approach (in the UK this has taken the form of prudential financial resource requirements contained in the FSA's Prudential Sourcebook), under Solvency II. However, because much of the business in Bermuda is reinsurance business or commercially brokered it should be noted that much reliance is placed on ratings given by external rating agencies as to reinsurer's capital strength rather than on pure regulatory requirements and this creates its own dynamic irrespective of the minimum regulatory requirements.
In Bermuda, an application to register as a reinsurance company is made on prescribed forms to the BMA and including a business plan in respect of the proposed programme. The BMA is assisted by the Insurers' Admissions Committee (comprising reinsurance professionals with the necessary expertise to evaluate applicants) in the process of reviewing all applications.
This injects an important element of "peer review" into the system, although the ultimate decision as to whether an applicant should be licensed rests with the BMA. The Bermuda model of reviewing applications is efficient - the process of incorporating a reinsurance company can be effected in a period of weeks rather than months (which is the case in other European jurisdictions such as the UK and Ireland).
In addition, the BMA vets the ultimate beneficial owners of all companies planning to incorporate in Bermuda, including reinsurance companies, and will only licence the company if it is satisfied that such owners are themselves fit and proper entities. The BMA may impose such conditions upon a company at the time of its registration as a reinsurer as it thinks fit including a condition that the reinsurer "shall, at all times and during the course of each financial year if it carries on insurance business meet and maintain the relevant solvency margin(s), liquidity and other ratios applicable under Bermuda law."
The BMA (like the FSA) has broad regulatory powers aimed at setting prudential standards within the reinsurance industry. These include the power to surpervise, regulate and inspect reinsurance companies and to investigate, obtain information and to seek statements of compliance from reinsurers.
As is also the case in the UK, the BMA has the power to make site visits to monitor compliance by individual reinsurers with the applicable regulatory requirements. This is an important additional tool in the regulatory armoury.
- Neil Horner is senior counsel and Rod Attride-Stirling managing partner of Attride-Stirling & Woloniecki.