Bermuda

In the 1950s, the ‘father of captive insurance’, Fred Reiss, coined the phrase ‘captive’ when forming the Steel Insurance Company for Youngstown Sheet & Tube Company.

In the 1950s, the ‘father of captive insurance’, Fred Reiss, coined the phrase ‘captive’ when forming the Steel Insurance Company for Youngstown Sheet & Tube Company.

In 1962, Reiss formed the International Risk Management—incorporated in Bermuda by a special act of parliament—introducing captive insurance to the island.

As the figures show, Bermuda has been an active captive domicile for more than 50 years. According to Lawrence Bird, president of the Bermuda Insurance Management Association, Bermuda’s captive industry began when alternative solutions were needed to offer an alternative to an inflexible commercial insurance market.

He says: “Since then, Bermuda quickly established itself as a captive insurance centre and has been the largest captive domicile ever since. This remains the case today and this is expected to continue for the foreseeable future.”

David Gibbons, director for assurance at PricewaterhouseCoopers, feels that the island’s longevity can be attributed to different factors.

He says: “Firstly, Bermuda has a world-renowned regulator that the business group trusts and knows that it can work with—whilst still being well respected in the global market as a regulator with integrity.”

“Secondly, Bermuda has an active sector of qualified professionals that specialise in insurance. Be it underwriters via the reinsurance market, captive managers or auditors.”

Gibbons also states that Bermuda’s “business friendly environment”—that operates at the same pace as New York, London and Toronto—also benefits the island as clients are served at an international standard as and when they need it.

A Bermuda Monetary Authority (BMA) spokesperson adds that as the world’s first captive domicile, Bermuda’s core attributes are rooted in decades of experience.

Bermuda has managed to remain the largest captive domicile for more than half a century, which is no mean feat considering the increased competition from rival jurisdictions.

Bird feels that there are several reasons that Bermuda has managed to retain its powerful position for such a long time, including the growth of the island’s captive infrastructure in terms of management companies, lawyers, and auditors, and also the expertise provided within that infrastructure.

“The commercial insurance and reinsurance market in Bermuda is huge with its own infrastructure, which provides a unique environment in which risk managers can benefit from holding captive meetings, market presentations and securing reinsurance for the captive.”

“In addition, the regulatory framework is robust and pragmatic with a consultative approach between industry and the regulators in terms of ensuring appropriate regulations and solutions to individual challenges and opportunities.”

Gibbons adds that as a veteran of the captive insurance game, Bermuda is well respected in the marketplace and existing companies domiciled on the island are comfortable with the service that they receive.

No niche required

Bermuda’s rival, the Cayman Islands, has established itself as a specialist for healthcare formation, but Bird believes that Bermuda’s lack of vocational calling isn’t an issue.

“Our vast size in terms of captives means there is not really a niche market for captives, which we feel can limit possibilities for captive owners. It is interesting to note, however, that healthcare captives make up a significant, if not the largest, proportion of our various industry groups which own captives and we expect to see the number of healthcare captives here continue to thrive and grow as we clearly have the expertise in this area,” notes Bird.

And while the island may well have marketed itself as an all-appealing location, Gibbons believes that Bermudian captives are enticed by the islands access to the reinsurance market.

He says: “We see Bermudian captives hold several different types of business, either in deductible areas or several different areas of the chain, including workers’ compensation, property, marine cargo and professional indemnity.”

“Bermuda also has its fair share of healthcare captive as well so I would have said it’s really the access to the reinsurance market that is Bermuda’s strength. Healthcare clients still come to Bermuda as opposed to the Cayman Islands as they are looking to benefit from the reinsurance market as well.”

The BMA spokesperson highlights that Bermuda’s experience in innovative alternative risk transfer products, such as special purpose insurers (SPIs), helps the island to not only retain its prominent position in the market but also attract new business. Bermuda’s registration of 20 new insurers during the first four months of 2013 is testament to the claim.

“New registrations were driven by SPIs, as Bermuda’s expertise in alternative risk transfer has made the jurisdiction a global centre for the creation, listing and servicing of insurance linked securities (ILS) that are sponsored by Bermuda-registered SPIs.”

“The total volume of new ILS issued globally in 2012 was $6.4 billion, with $2.5 billion (or 40 percent) of this total being sponsored in Bermuda. Overall, SPIs have provided another option for the market to build upon Bermuda’s longstanding expertise in alternative risk transfer.”

Onshore versus offshore

wMarsh’s recent annual benchmarking report found that in 2012 new captive owners continue to gravitate towards onshore destinations in the US and the EU. But according to the BMA spokesperson, the statistics aren’t a cause for concern for Bermuda.

“Clearly the environment overall is becomingly increasingly competitive. However, Bermuda is in the unique position of being able to service the full spectrum of insurance: from commercial insurers, to captives to reinsurers. The entire jurisdiction remains committed to providing quality regulation and service delivery for captives. This commitment is driven by the recognition that captives remain a core business for this jurisdiction.”

Gibbons is of the opinion that companies are subject to individual business cycles, so in mature markets such as Bermuda clients tend to come and go.

“I think that in any market people are looking at what makes the most sense for them, and are therefore basing their decision of where their business should be located on facts.”

“There are also uncertainties surrounding other issues in the market such as US taxation and Solvency II. Captives come to Bermuda because they think it’s the best place with regards to Solvency II as it allows them the option of either being Solvency II equivalent or not.”

Bird feels that the reference to onshore versus offshore “is moot these days and frankly, misleading”.

“Where a successful model exists in a country, so other jurisdictions are bound to copy it and there are many captive domiciles in a variety of territories. It is to be expected that new captive owners will sometimes set up elsewhere.”

“The differences, where they exist at all, are often negligible and certainly, what you can do in US domiciles for example, you can virtually always do in Bermuda as well. So, as long as new captive owners are properly informed, Bermuda will continue to grow,” adds Bird.

Committing to the cause

In April, the Bermuda Business Development Corporation (BBDC) completed its merger with Business Bermuda and the Insurance Development Council.

The BMA spokesperson says that the BBDC merger has renewed the island’s focus on the development of new business, as well as supporting existing business.

As a member of one of the BBDC sub-committees, Gibbons has first-hand experience of the recent merger. He feels that by setting aside competitive differences, the service professionals involved have been able to work towards the betterment of the territory.

“We’ve realised that its good for all of us to promote Bermuda, and talk about Bermuda’s strengths, rather than us being competitive in the same space, so I think the merger has been a very positive event.”

“There is a lot more competition out there for Bermuda, as a lot more US states are entering the game. So Bermuda’s continued success is incumbent on the BBDC and everyone in the Bermuda market to continue to talk about the advantages of Bermuda.”