There are a variety of relevant captive insurance domiciles, including offshore and US onshore opportunities. However, not all domiciles are created equal - and a careful review of any jurisdiction should form an integral part of any scoping exercise before establishment.
With a strong reputation as a robust and efficient financial centre, there are a number of reasons why Bermuda has been the world's leading captive domicile since their inception.
It has long been accepted that Bermuda is a sophisticated, credible and legislatively developed jurisdiction, particularly regarding insurance products, both traditional and exotic. The Bermuda Insurance Act is bifurcated into rules that, acknowledging obvious differences, provide for a designated captive framework and one applicable to the larger, more complex commercial insurers.
In 2016, the European Commission deemed Bermuda's prudential standards for commercial insurers to be equivalent to regulatory standards applicable to European insurance companies under the EU's Solvency II Directive. Bermuda is one of only two non-EU jurisdictions to enjoy Solvency II equivalency - an extremely strong onshore endorsement of the jurisdiction. The advantages of being deemed Solvency II equivalent are principally that an insurer can elect to have its home, group regulator as the Bermuda Monetary Authority, which allows Bermuda (re)insurers and groups to conduct business in the EU without additional regulatory requirements and, more importantly, on an even playing field with existing EU insurance companies.
In early 2020, Bermuda was recognised by the Caribbean Financial Action Task Force for its exceptional work to establish an effective framework to combat money laundering and the financing of terrorism and proliferation. In February 2020 the Government of Bermuda confirmed that Economic and Financial Affairs Council (ECOFIN) had graded Bermuda as a 'cooperative jurisdiction' with respect to good tax governance; in turn, Bermuda was upgraded to the 'white list'.
The Bermuda captive market is particularly well developed and consequently attracts and retains human capital talent, necessarily providing captive owners dedicated access in a relatively small area to quality advice and guidance.
While globalisation and digitalisation has made it possible to operate a company with little physical substance in the jurisdiction of incorporation, there is a more recent demand for a demonstrable alignment of substance with the domicile of incorporation. When choosing a captive domicile, its ability to accommodate substance should therefore be considered.
Bermuda has implemented a series of positive and highly nuanced upgrades to the substance-related regulatory environment, including: amendments and refinements to applicable legislation, the publication of general guidance notes to assist entities within scope, their boards and advisers to clarify entities' obligations under the applicable legislation and regulation, and most importantly, the ability and methodology to comply.
Given the broad definition of 'in scope' entities (some estimates have the number of affected companies as high as 14,000) and the compressed timeline for full compliance, a collaborative effort was undertaken by the Ministry of Finance and the Registrar of Companies working with industry experts to develop appropriate amendments to the existing framework while always reconciling to the requirements of the relevant EU Authority.
Captive insurance is not a one-size-fits-all business and therefore dialogue between regulators and captive owners is essential. Bermuda enjoys regulation by a credible, sophisticated and knowledgeable regulator in the authority, who have developed, in particular, a team that has broad insurance industry knowledge. As a consequence of which, the jurisdiction is able to provide clear and consistent speed to market for players establishing structures here. The authority's broad knowledge of this particular industry makes them inherently open for dialogue with industry, which is incredibly important to avoid shocks to the market.
Bermuda embraces technology and innovation and this is being incorporated into its insurance industry. The authority recently introduced 'sandbox' and 'innovation' amendments to its rules, primarily aimed at insurtech start-ups. These amendments reduce barriers to entry for start-ups with new, untested ideas, and provide an incubator for new insurers with innovative business models needing time to develop. These new rules include appropriate regulatory oversight, time limitations, disclosure requirements and statutory reporting designed to protect policyholders.
The journey to captive ownership in Bermuda should begin with a feasibility study, involving such techniques as a cost versus benefit analysis, qualitative analysis and stress testing.
Minimisation of losses is critical, and the captive owner's loss experience history, including frequency and severity of losses, provide valuable insights into the feasibility of a captive. High-frequency, low-severity losses may be more tolerable than low-frequency, high-severity losses, or vice versa. The data analysed will ideally cover five to 10 years' loss experience depending on the type of business written.
If a separate captive is not feasible, other options to consider include insurance pools rent a captive and rent-a-cell programmes that allow insurance business to be written without setting up a separate captive. Another key decision is whether a 'pure captive' is suitable, or if some unrelated business will be written, requiring a different licence.
After selecting service providers, the captive owner will need to front initial costs, including legal fees, incorporation fees, licensing fees and other consultation fees. Captives must maintain a minimum capital level, which varies depending on its licence. In Bermuda, a single-parent captive writing only related business is required to maintain a minimum capital starting at $120,000. The capital outlay for a captive is important because of the 'cost of capital' to the owner, who may not immediately receive dividends and a return on investment.
As the captive accumulates capital and surplus from profitable operations, it will be able to support additional business, or pay dividends to the captive owner, subject to meeting solvency and minimum capital rules.
Our team provide a full suite of administration and fiduciary services to the ILS and captive market from our Bermuda, Cayman and BVI offices, ensuring that all structures remain compliant with applicable regulations in each jurisdiction. We add value throughout the life cycle, from incorporation and licensing, to unwinding and voluntary liquidations when the structure ends its natural life - precision and technical expertise has been the hallmark of our service offerings to this important global industry.