Bermuda Insurance Companies

1 INTRODUCTION

Bermuda's insurance industry began in 1947 when the founder of the American International Group (C.V. Starr) based the group's international business in Bermuda. In the 1960s, Bermuda became a pioneering domicile for captive insurance companies and is now the world's second largest domicile for captive companies, after the United States. Alongside the captive industry, Bermuda has also attracted a large number of general business and long-term business commercial insurers which write a wide range of insurance and reinsurance products.

Recognising that a system of regulation is essential to maintain a healthy insurance industry, the public and private sectors worked together to produce the Insurance Act 1978. Since that time, the laws and regulations pertaining to Bermuda's insurance industry have been regularly amended to recognize the diverse range of underwriting activities conducted by Bermuda insurers and reinsurers. In the lead up to attaining Solvency II equivalency in early 2016, Bermuda phased in a number of new regulations designed to bolster its regulatory and supervisory framework, particularly as it relates to its commercial insurers.

2 INSURANCE REGULATORY FRAMEWORK

2.1 Insurance Licensing and Regulatory Legislation

The insurance licensing and regulatory regime in Bermuda is primarily comprised of the Insurance Act 1978, as amended (the "Insurance Act") and its related regulations (the "Regulations"). Hereinafter, references to the "Insurance Act" are to the Insurance Act 1978 and the Regulations.

The Insurance Act applies to any person carrying on insurance business in or from within Bermuda, including local companies (companies that are predominantly owned by Bermudians and which carry on business mainly within the domestic economy), exempted companies (companies that are predominantly owned by non-Bermudians and which carry on business from Bermuda but not within the domestic economy unless licensed to do so), non-resident insurance undertakings (which are incorporated overseas and carry on domestic business in Bermuda pursuant to a permit granted under the NonResident Insurance Undertakings Act 1967) and overseas permit companies (which are incorporated overseas and carry on non-domestic insurance business from an office in Bermuda pursuant to a permit granted under the Companies Act 1981). All persons carrying on business in or from within Bermuda as an insurance manager, broker, agent, marketplace provider or salesman are also required to be registered under the Insurance Act.

The Insurance Act distinguishes between long term business, special purpose business and general business.

Long term business consists of insurance contracts covering life, annuity, accident and disability risks, and certain other types of contracts which do not include "excepted long-term business" (as defined in the Insurance Act).

Special purpose business includes insurance business under which an insurer fully funds its liabilities to its insureds through the proceeds of a debt issuance, cash, time deposits or some other financing mechanism approved by the Bermuda Monetary Authority (the "BMA").

General business is any insurance business which is not long-term or special purpose business and includes accident and disability policies in effect for less than 5 years.

The Insurance Act does not distinguish between insurers and reinsurers: companies are registered under the Insurance Act as "insurers" (although in certain circumstances a condition to registration may be imposed to the effect that the company may carry on only reinsurance business). However, the Insurance Act does distinguish between 'captive insurers', being insurers that predominantly insure the risks of their affiliates (i.e. Class 1, Class 2, Class 3, Class A and Class B insurers), and 'commercial insurers', being insurers that predominantly insure third party risks (i.e. Class 3A, Class 3B, Class 4, Class C, Class D and Class E insurers). The Insurance Act uses the defined term "insurance business" to include reinsurance. References herein to insurance companies include reinsurance companies.

2.2 The Bermuda Monetary Authority

The regulation of those matters pertaining to the Insurance Act is the responsibility of the BMA. The BMA is responsible for the licensing, regulation, supervision and inspection of Bermuda's insurance companies and for the licensing of all insurance brokers, agents, managers, marketplace providers and salesmen.

3 REGISTRATION UNDER THE INSURANCE ACT

All persons seeking to carry on insurance business in or from within Bermuda are required to be registered under the Insurance Act. All applications for registration are subject to BMA approval. When making an application, a captive insurer or a special purpose insurer must, among other things, submit an acceptable business plan and 5-year financial projections. Commercial insurers and collateralized insurers submit a more detailed application including detail regarding the proposed directors and senior management, investment strategy, code of conduct, compliance and pro forma runs of the Bermuda Solvency and Capital Model, in addition to information regarding the insurer's underwriting strategy. There is a separate application process and licensing regime for those persons seeking to carry on business as Innovative Insurers or innovative intermediaries (i.e. insurance marketplace providers).

Where the applicant is seeking registration as an insurance manager, broker, agent, marketplace provider or salesman under the Insurance Act, a business plan and application form must be submitted to the BMA and an applicant seeking registration as a broker or manager is also required to provide evidence that they have at least $1 million of professional indemnity insurance coverage. A marketplace provider will need to provide evidence that it has in place sufficient indemnity insurance coverage which may be appropriate given the nature, scale and complexity of its business.

When considering whether or not to approve an application, the BMA is bound by the Insurance Act to have regard to whether the applicants are conducting, or will conduct business in a prudent manner, with integrity and the professional skills appropriate to the nature and scale of the company's business. The BMA also must be satisfied that every person who is, or would be, a controller or senior officer of a registered entity is a fit and proper person to perform the functions pertaining to the company's activities

The BMA has the discretion to approve or decline any registration application or to impose conditions if it feels it is appropriate to do so. The BMA is required to exercise its discretion in the public interest.

3.1 Incorporation of New Insurance Companies

Initially, an "in principle" application for registration as an insurer is submitted to the BMA. It is possible to delay the incorporation of the new company until the in principle application has been approved. However, most applicants prefer to incorporate and organise the new company prior to receiving the in principle approval so they can proceed with opening bank accounts and other preliminary matters.

Once the approval in principle has been received and the necessary capital (as described in its business plan) has been paid into the company, a formal application may then be made for the company to be registered as an insurer. This application closely resembles the initial application, particularly if no change in circumstances has occurred between the initial application and the time of the formal application being filed.

The incorporation submission and the application for registration do not form a part of any public file in Bermuda.

Registration under the Insurance Act, once granted, remains in force until cancelled by the BMA on any grounds specified in the Insurance Act.

4 GENERAL BUSINESS INSURERS

4.1 General Business Classifications

The classes of general business insurer range from pure captives (companies established with the specific objective of financing risks emanating from its parent or parent group) to large commercial insurers writing excess liability or property catastrophe reinsurance business.

Brief descriptions of the criteria applicable to the various general business insurance classifications are set out below:

Class 1 Insurers

A company is registrable as a Class 1 insurer where it is wholly owned by one person and intends to carry on insurance business consisting only of insuring the risks of that person or its affiliates.

Such insurers are often referred to as "pure captives" and are subject to the lowest regulatory oversight of all the classes of general business insurer

A Class 1 insurer must have paid up share capital of at least $120,000

Class 2 Insurers

A company is registrable as a Class 2 insurer where it is wholly owned by two or more unrelated persons and intends to carry on general business with not less than 80% of the net premiums written for the purpose of:

1. insuring the risks of any of those persons or of any affiliates of any of those persons, or
2. insuring risks which, in the opinion of the BMA, arise out of the business or operations of those persons or any of their affiliates.

While still regarded as "captives", such companies differ from pure captives in two ways: (1) they have more than one owner, and (2) as much as 20% of the risks that they insure may come from outside their ownership group.

Class 2 insurers are subject to the next lowest regulatory oversight of all classes of general business insurer.

A Class 2 insurer must have paid up share capital of at least $120,000

Class 3 Insurers

A body corporate carrying on general business is registrable as a Class 3 insurer where it is not otherwise registrable as a Class 1, Class 2, Class 3A, Class 3B, Class 4, Class IIGB, Collateralized Insurer, or Special Purpose Insurer.

For regulatory purposes, Class 3 insurers are generally regarded as "captives" and are subject to less rigorous regulation than Class 3A, Class 3B and Class 4 insurers.

A Class 3 insurer must have paid up share capital of at least $120,000.

Class 3A Insurers

A company is registrable as a Class 3A where it intends to carry on general business and;

1. 50% or more of the net premiums written; or
2. 50% or more of the loss and loss expense provisions

represent unrelated business and its total net premiums written from unrelated business are less than $50 million.

Class 3As are regarded as small commercial insurers and are subject to more rigorous regulatory and supervisory oversight than captive insurers.A Class 3A insurer must have paid up share capital of at least $120,000 and capital and surplus of at least $1,000,000.

Class 3B Insurers

A company is registrable as a Class 3B insurer where it intends to carry on general business and;

1. 50% or more of the net premiums written; or
2. 50% or more of the loss and loss expense provisions

represent unrelated business and its total net premiums written from unrelated business are $50 million or more.

Class 3Bs are regarded as large commercial insurers and attract more or less the same level of regulatory oversight as the Class 4 insurers, the most heavily regulated class.

A Class 3B insurer must have paid up share capital of at least $120,000 and capital and surplus of at least $1,000,000.

Class 4 Insurers

A company is registrable as a Class 4 insurer where it intends to carry on general business and;

1. it has at the time of its application for registration, or will have before it carries on insurance business, a total statutory capital and surplus of not less than $100,000,000; and
2. it intends to carry on insurance business including excess liability business or property catastrophe reinsurance business.

Class 4 insurers currently undergo the most rigorous regulatory oversight of any class of general business insurer, and in recent years, the regulatory and supervisory regime pertaining to Class 4 insurers has been bolstered, particularly in the areas of capital adequacy, governance, own risk and solvency assessment and increased public disclosure and transparency.

A Class 4 insurer must have paid up share capital of at least $1,000,000 and capital and surplus of at least $100,000,000.

Class IIGB Insurers

A company is registrable as a Class IIGB Insurer where it intends to carry on general business in an innovative manner, but outside of the regulatory 'sandbox' approach used for Class IGB and ILT insurers (See Section 8).

A Class IIGB Insurer must have paid up share capital of at least $120,000

4.2 Minimum Solvency Margins (General Business)

All general business insurers' statutory assets must exceed their statutory liabilities by an amount greater than or equal to a prescribed minimum solvency margin which varies depending on the category of their registration and their net premiums written and loss reserves posted (the "Minimum Solvency Margin").

The Minimum Solvency Margin for a Class 1 insurer is the greater of:

1. $120,000, or
2. 20% of the first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 10% of net premiums written in excess of $6 million, or
3. 10% of net discounted aggregate loss and loss expense provisions and other insurance reserves.

The Minimum Solvency Margin for a Class 2 insurer is the greater of:

1. $250,000, or
2. 20% of the first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 10% of net premiums written in excess of $6 million, or
3. 10% of net discounted aggregate loss and loss expense provisions and other insurance reserves.

The Minimum Solvency Margin for Class 3 insurers is the greater of:

1. $1 million, or
2. 20% of the first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 15% of net premiums written in excess of $6 million, or
3. 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves.

The Minimum Solvency Margin for Class 3A and Class 3B insurers is the greater of:

1. $1 million, or
2. 20% of the first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 15% of net premiums written in excess of $6 million, or
3. 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves, or
4. 25% of its ECR (described below) as reported at the end of the relevant year

The Minimum Solvency Margin that must be maintained by a Class 4 insurer is the greater of:

1. $100 million, or
2. 50% of net premiums written (with a credit for reinsurance ceded not exceeding 25% of gross premiums), or
3. 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves, or
4. 25% of its ECR (described below) as reported at the end of the relevant year.

The Minimum Solvency Margin that must be maintained by a Class IIGB insurer is the greater of:

1. $120,000, or
2. 20% of net premiums, where net premiums written by the Class IIGB insurer in its current financial year (or projected to be written, in the case of an application for registration as a Class IIGB insurer) do not, or (as the case may be) are not projected to, exceed $6,000,000, or
3. $1,200,000 plus 15% of net premiums written by the Class IIGB insurer in its current financial year (or projected to be written, in the case of an application for registration as a Class IIGB insurer) do, or (as the case may be) are projected to, exceed $6,000,000, or
4. 15% of the aggregate of net loss and loss expenses provisions and other insurance general reserves, as indicated in the Class IIGB insurer's statutory financial statements (or as projected in the case of an application for registration), or
5. 25% of the Class IIGB insurer's ECR reported at the end of its relevant year.

Any insurer which at any time fails to meet its Minimum Solvency Margin must, upon becoming aware of such failure, immediately notify the BMA and within 14 days thereafter file a written report containing particulars of the circumstances that gave rise to the failure and setting out its plan (detailing specific actions to be taken and the expected timeframe) as to how the insurer intends to rectify the failure.

To view the full article clickhere

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.