As a leader in the captive industry, Bermuda continued to see a year-on-year increase to its captive figures in 2019. Industry experts discuss current market trends, regulation and what to expect for this year
The small island of Bermuda is a treat to experience with its colourful buildings, ever-lasting ocean views and charming locals. But Bermuda offers a lot more than just physical beauty, the island’s insurance and reinsurance sector form the largest part of its international business and is home to the largest offshore captive insurance domicile. The island prides itself in having a unique selling point with a high street for all your insurance needs.
At the end of 2019, Bermuda continues to be the leading captive domicile with 715 captives, which approximately generated $40 billion in premiums. The Bermuda Monetary Authority (BMA) regulates Bermuda’s financial services sector and has a reputation of having an ‘open door policy’.
Plain sailing
On the current captive insurance market in Bermuda, Jereme Ramsay—at the time of writing, was business development manager of the Bermuda Business Development Agency (BDA) but has since joined KPMG Bermuda—said: “We see significant growth across long-term captives such as the UK pension schemes and employee benefits (EB) placing their risks into a captive structure”.
He adds: “Property and casualty (P&C) captives continue to flow, we’ve seen an uptake of interest across EB. We’re optimistic about this year, especially from three lines of business; auto; property; and cannabis.”
Industry participants are suggesting that Bermuda is currently experiencing a ‘steady market’.
Brian Quinn, managing director, founding director of Granite Management, says that due to heavy competition around the world, “the island is not expanding greatly”.
He explains: “The market in [Bermuda] is very steady and where people want a more integrated solution, integrated with the insurance market or new innovations – those kinds of captive clients come to Bermuda”.
Also weighing in, David Gibbons, partner, captive insurance leader, PwC, illustrates that Bermuda has a very US-focused market as a lot of captives located on the island are from the US.
However, he notes that of the new formations of 2019 in Bermuda, a quarter came from Canada. He outlines that the interest from Canada continues to grow and that Latin America continues to be an interest, particularly Colombia.
Gibbons adds: “The BDA is working with industry to increase Bermuda’s exposure in Asia.”
Bermuda has been visiting both Latin America and Canada for a number of years to promote itself as a ‘world-leading’ captive insurance domicile, but as many industry participants have noted in the past, companies have to get comfortable with change and establishing relationships can take time.
Discussing Canada, Gibbons says: “The Bermuda market expected a larger influx of Canadian companies when the Tax Information Exchange Agreement was signed in 2011. We are beginning to see that influx now as Bermuda’s reputation grows in Canada, and Canadian companies look to utilise not only Bermuda’s captive market but also the reinsurers that reside there.”
Echoing the trend in both Canada and Latin America, Leslie Robinson, senior vice president, Willis Towers Watson (WTW), says: “We continue to see formations out of the US but we’re also seeing formations out of Latin America.”
“Bermuda, through the work of the Bermuda BDA, has been working for some years in marketing the captive concept to Latin America, and our own shop is now getting quite involved with Latin America, and as a result, we are seeing some growth in captive formations from this region.”
“Also, Canada is another area where our peers are seeing some growth in captive formations, and this is again due to the work of the Bermuda Business Development Agency in the marketing of captives and the Bermuda jurisdiction to Canadian firms,” she adds.
Wave of trends
As the use of technology continues to grow, the risk of cyber breaches heightens, and although traditional insurance faces difficulty when dealing with cyber risks, captives continue to thrive as a useful coverage tool. This trend can also be seen in Bermuda, Ramsay explains that “insurers are utilising their captive structure to fund their cyber risk programmes and having direct access to carriers that actually provide that line of business from a reinsurance side”.
He adds: “Cyber risk is extremely hard to scratch the surface in terms of cover and prices are too expensive, so funding their captive structure has been ideal and allow them to put that capital aside for a rainy day for when it does come. But also, giving them direct access to another layer with another insurance market.”
One of the most common trends industry professionals are seeing is the hardening of the market. The captive insurance industry has been at the behest of a soft market for a considerable amount of time, it had been a perfect storm of a comparatively low level of catastrophic losses and the desire of new capital to find investments that have provided a decent return over the last few years and present risks that are uncorrelated with more traditional asset classes.
Although the soft market had a greater impact on the commercial market than the captive insurance industry, companies were experiencing growth at a much slower rate than previous.
Now, the industry is seeing a hardening market, and the interest around the captive market creeping back to a more steady rate.
Mike Parrish, head of client services at Marsh Management Services (Bermuda), suggested that challenges in the commercial market for certain casualty and professional liability lines are having an impact on the trends they are seeing.
Parrish says: “We’re seeing an increase in captives taking larger retentions and using the captive more to try to reduce the external costs of insurance, in areas they may not have previously been involved with.”
Additionally, Robinson believes the hardening market will help push captive formations and new business in existing captives.
She explains: “What I also find is that clients are using their captives as leverage to try and help with some of this increased pricing.”
She continues: “For example, in some cases, the captive is used to buy down increased deductibles that are being required with the commercial insurers in order to mitigate some of the increase in premium. In other instances, captive owners may never expand the use of the captive, but hold the captive as an option to help with pricing negotiations with the commercial market underwriters.”
Regulation and reputation
A domicile heavily relies on a good reputation in order to draw in businesses to set up their captives. So that Bermuda’s commercial insurers and reinsurers and insurance groups will not be disadvantaged when competing for and writing business in the EU, Bermuda implemented a regulatory framework to become Solvency II equivalent.
Solvency II is a harmonised framework aimed at ensuring there is a single market, utilising a single set of rules for insurance services
Bermuda was granted full equivalence by the European Commission in 2015 to comply with the Solvency II directive meaning European companies can operate in Bermuda. While also having 953(d) election, meaning even if the captive is based in Bermuda, the owner will still be a US taxpayer.
Quinn says: “The BMA has a great reputation and very stringent regulations in terms of how they manage the insurance industry in Bermuda. In my opinion, a far superior regulatory regime than other domiciles in the world, in that respect.”
Gibbons believes having good regulations is key to a good domicile. He says: “Bermuda enjoys the only bifurcated regulation of a Solvency II equivalent regime for the commercial space and the risk-based local regime for captives. Having both allows captives to elect to be Solvency II compliant by moving into a commercial classification if they are writing business in Europe.”
He continues: “This along with the recognition by the NAIC of Bermuda as a qualified jurisdiction shows how experienced and respected the BMA is and gives captive owners increased comfort.”
Robinson believes the main challenge is that as Bermuda is a leading jurisdiction, all international eyes are on them.
She explains: “Particularly when it comes to regulatory standard setting bodies, as they are always looking at Bermuda. As a result, it has caused us to undergo continuous assessments of our actual market and this has led to increased legislation and regulation in all segments of our financial services market, including captives.”
Parrish states that the increased regulatory and compliance environment will negatively impact operational costs. This will be a challenge, he said, for the captive sector as managers try to keep the cost of doing business at a manageable level.
He explains: “All service providers now have an increased administrative workload to maintain compliance with regulations around AML/KYC and Economic Substance and we accept that this is not going to change and is a necessary part of maintaining Bermuda’s reputation and integrity.”
However, he adds: “Clearly if the cost of doing business in a place like Bermuda becomes prohibitive then some companies may question the value of having a subsidiary domiciled here and explore alternatives.”
Island in the stream
As we start a new decade, what does 2020 have in store for Bermuda?
Ramsay says he is “optimistic” based on conversations he has had around the growth that’s going to happen in the first two quarters of 2020. He explains that this is based on the level of interest and the amount of new prospective clients that Bermuda is working with.
Parrish believes that 2020 has the potential to be an interesting year for its captive sector in Bermuda.
He reflects back to the challenging pricing outlook in the commercial market and views this as a trigger for more companies retaining risk and either forming captives or expanding the uses of the captives that they have.
He adds: “I expect 2020 to be a busy year in the captive industry, I think we’ll see some new formations from companies struggling to find cover, along with expanded uses of our existing captives.”
Quinn thinks “captives will grow” because of the increased interest in employee benefits.
He adds: “There are around 120/150 employee benefits captives at the moment in the world, out of 5,000 or so captives. It’s quite a small number but there are hundreds looking at bringing employee benefits into their captives.”
Gibbons outlines that 2020 will be the first year that captives have to submit economic substance filings describing the level of activity that is performed in Bermuda.
He explains: “These filings will require owners and risk managers to review the governance and operating processes around their captive. The companies that have gone through this so far have realised that their captives are underutilised and are using this as the time to expand the level of activity in the captive.”
Finally, if the hardening market continues, like it’s suspected, Gibbons believes companies will look at their captives again to supplement market cover. He explains that “it’s almost a back to basics approach” as this was the original reason captives were formed.
