With a responsive government, a solid infrastructure, a great location and $444 billion total assets–$72 billion captive-related–Bermuda's insurance industry, the “gem in Bermuda's crown,” is still attracting risk managers, said industry experts and members of Bermuda's government here.

The insurance and captive destination remains popular in spite of domicile competition and a soft market, they said.

“We're seeking to make sure our regulatory framework stays ahead of the game and to be responsive,” said Deputy Premier and Minister of Finance for the Government of Bermuda, Paula A. Cox, in San Diego for the Risk and Insurance Management Society conference where Bermuda is a regular exhibitor. “When there are legitimate issues raised about how we can further enhance, we seek to accommodate and move fairly quickly.”

At the same time, she told National Underwriter, Bermuda seeks balance. The aim is to regulate, but “not too quickly, not unthinkingly. We have to always remember the cost-benefit analysis and yet still remember to put pride of place and reputation” first.

This is why, she added, “it's quality, not quantity. We're not a brass plate jurisdiction. We're real people on the ground with real services.”

She observed that interest in Bermuda at the RIMS conference has not waned. In fact, “a number of interested people have come by the Bermuda booth and said they are thinking of coming to Bermuda. So there's still a Bermuda buzz,” she said.

As a captive domicile, Bermuda is “clearly growing and captives are continuing to grow,” she said. Bermuda licensed about 76 captives in 2007, compared to 82 in 2006. “So the growth is still there, still steady, although it may not have been as high as the year before.”

If anything, she said, Bermuda's captive growth rate is probably appreciably higher than is reflected by the numbers. She explained that rather than counting the segregated cells in a captive, the captive is considered to be one company.

Segregated cell and rent-a-captives have opened up the Bermuda market to smaller entities. She said that although Bermuda was first to introduce segregated cells, through its private act, public legislation was introduced for cells in 2000.

Ms. Cox said that Bermuda's focus, “even in terms of captives, is that we distinguish ourselves in that area. The captives are rather complex structures as opposed to the generic, and we seek to not be a one-size-fits-all for captives.”

She acknowledged that on top of the soft market, competition for captives is much stiffer.

Donald Scott, financial secretary, Government of Bermuda, noted that although competition for captives is keen and the number of formations in the United States is up, “if you look at the United States as a single jurisdiction, and look across the board, Bermuda is still the leading domicile for formation of captives in the world.”

He added, “Mind you, we're not blind to the fact that the competition is getting stiffer. Regulatory changes in the United States are making it more facilitative for captives to set up and be successful.”

One of the challenges in the United States is that because of its regulatory framework, established individually at state level, there is “no federal umbrella to allow interstate business in that regard. That's one of the things I think is holding back further development of larger captives in the United States,” he said.

A large corporation trying to do business across continental North America, for example, must comply with “the different regulations that exist in any number of different states, which complicates the business.”

Mr. Scott also noted that Bermuda's infrastructure has capacity for any number of formations. “There's no lack of capacity,” he said. “We have well-established captive managers in Bermuda, and their ability to take on new business seems to be infinite.”

Shanna D. R. Lespere, director of licensing and authorizations for insurance, with the Bermuda Monetary Authority, said that although there are a number of jurisdictions, “Bermuda has been fortunate in that we've had a stellar reputation in the captive industry.”

She added that the domicile continues to look for quality companies to form captives.

“Even though the market was soft and incorporations probably fell down in most of the jurisdictions, we still got more than our fair share of those captive companies,” Ms. Lespere said.

Although she sees no particular coverage trends, “I've been impressed over the last couple of days here at RIMS by the number of companies coming to us, saying they are looking to incorporate new captives in Bermuda and actually are quite far along in the planning process.”

She added, “They know they want a captive, and a lot of them have actually performed feasibility studies and decided they want to come to Bermuda.”

Shelby Weldon, director of compliance and insurance with the Bermuda Monetary Authority, said most lines of business are still written through the captive vehicle.

“I would add that one of the attractions of Bermuda is the fact that we also have a significant commercial reinsurance market,” he said. “So those captives are able to access the reinsurance market that complements their captive initiative,” Mr. Weldon added.

While formations in Bermuda are typically from all over the United States, “we are even seeing interest from emerging markets,” he said, “including Latin America and Asia. Historically our business was U.S.-based, but it's spreading globally now with some emerging markets seeing the benefits of having a captive.”

Ms. Lespere added that some of these companies are new to the captive game, “so they're insuring those risks they feel they can put in their portfolio from a risk management perspective that suits their needs.”

Coverage runs from property to employee benefits to workers' compensation, and “we're still seeing a lot of interest in health care,” she said.

Part of the attraction, she added, is the “one-stop shop” available in Bermuda. “We have our captive sector and our commercial sector.” From a regulatory point of view, she said Bermuda has been “very careful to insure that we regulate them differently, because the risks are different.”

Mr. Weldon said, “Without a doubt, insurance is the biggest industry in Bermuda.”

Ms. Lespere added that while their numbers are large, “we're in the quality business, not just the quantity business.” And while premium volume is “very significant, it's not just about the number of captives, it's what premium they're writing, are they implementing new programs, how are they utilizing their captives and the changes in the market.”

She said that “from a risk management perspective, I think most organizations find [captives] quite useful as an asset.”

Even though Bermuda could be seen as a paradise among insurance domiciles, there are a few challenges.

David Kendall, co-chair of the insurance and reinsurance department in the London office of the global law firm of Edwards Angell Palmer & Dodge, LLP, said in a telephone interview that there is a concern that Bermuda be seen as an effective regulator.

He explained that among Bermuda's strengths are its regulatory flexibility and a “lighter touch than seen in the United States or probably the European Union, which is attractive to people setting up business there, and it's quite a fast track procedure.”

Regulatory authorities in Bermuda, conscious of comparisons between them and other major jurisdictions such as the United States, Europe and Dubai, are “upping their game,” he said.

Mr. Kendall noted, “I think it's the major commercial insurance and reinsurance companies in Bermuda that are bringing that pressure. It's important from their point of view, particularly where they are quoted on NASDAQ or in Europe, that they be seen to have an efficient and effective regulator.”

Overall, he said Bermuda “is doing most [of its business] with large insurers, and I think that is how Bermuda would like to be perceived now. Bermuda now is a better reinsurance market than London.”

He noted, however, that the domicile is still attractive to captive interests. One of its biggest attractions is its infrastructure, which attracts captives and risk managers to the island because “they have all the experts there,” he said.

Of concern to the entire industry in Bermuda is the availability of work permits for expatriates. He explained that the government has said that for those workers not demonstrated to be essential, the maximum period they can work on the island is six years.

“That creates uncertainty,” he said. “You used to be able to extend a work permit, but they have become much stricter. They want those jobs to remain local.”

He noted that it's difficult to tell whether new jobs are being created for local people as a consequence of the policy, however. “It may be too early to tell.”

Another issue being faced on the island is the weak dollar. “I think it's difficult to attract people from Europe, particularly London,” he said.

U.S. workers, he said, are having a problem with accommodations.

“Until a couple of years ago, the employer could provide accommodations without that being subject to U.S. tax,” he said. “The IRS will now tax the U.S. citizen for the benefit of the housing accommodation, and rental housing in Bermuda is very expensive.”

In fact, he said, rent typically charged for a house in Bermuda is about $10,000 a month. “So if you have to pay tax on that, it becomes a factor,” he said.

Mr. Kendall noted that in general, “the insurance sector in Bermuda is positive. It's still growing and is still a major center for insurance and reinsurance.”

“The old-timers say these things have come up in the past and they haven't really put people off,” he added.

Mark Spurlock, senior manager in the London office of SMART Business Advisory and Consulting, compared the Bermuda and London markets.

“London is a great place to get all of your insurance needs taken care of,” he said. “It's a one-stop shop. Pretty much whatever is insurable is insurable in London.”

Bermuda, on the other hand, is where “a lot of the reinsurance world is based. If you look at the U.S. reinsurance [industry] and where that capacity is–property, medical, agricultural–a huge portion is reinsured through Bermuda.”

He added, “If you're a risk manager, Bermuda is great from a captive or self- insurance perspective. More and more it's getting some direct capacity.”

For those who haven't formed a captive beforehand, or have areas of a risk profile not being put through a captive, “it's relatively easy to do that without too much effort on your part,” he said. “There are service providers to help you establish, manage and run a captive, so that's a good route. For the wily risk manager, it can be a very cost effective way of managing risk.”

Of the average premium, he said, “you're getting to near 50 percent when you're talking about the operating costs, the broker margin, the underwriter expected margins and so on, before you're talking about what the insureds will ever get back in claims.” On the other hand, with captives, “it's about paying out in claims as much of it as possible.” With a captive, “operational claims handling and value-chain costs get taken out of the loop.”

While some types of risks are not totally conducive to captives, a company still wants to be insured or have external capital in place for events that could take it out of business, he noted.

“Interestingly, this is where a lot of insureds are getting insured on both sides,” he said. On one side is self-insurance, for the more common event that you can predict and assign capital for–where Bermuda can come in. On the other side is where insureds are getting squeezed by the capital markets, the catastrophe bonds, the risk outsourcing to the capital markets, he said.

“Bermuda is actually pretty good at those on the reinsurance side. The reinsurers will offload a lot of the risk–securitize the risk–and take it to the capital markets.”

When looking to set up a captive, he said risk managers typically work with their broker to decide on a domicile. “The brokers will make a decision based on the price of risk or how well it fits the coverage that's required,” he said.

“The relationships, the platforms the insurers have in the different geographies are relatively important, but these risks get intermediated by brokers and it is their business to know where best to place a risk.”

He noted that the volume of captives globally has stabilized. “Bermuda holds its own,” he said. “I suspect it has half of all captives in the world.”

He added, “You tend to get more captives in the hard market. During a soft market when premiums are going down, there is not as much incentive in looking at alternative risk.”

In Bermuda, “it's quality, not quantity. We're not a brass plate jurisdiction. We're real people on the ground with real services.”

Paula A. Cox, Deputy Premier and Minister of Finance for the Government of Bermuda

“If you look at the United States as a single jurisdiction, and look across the board, Bermuda is still the leading domicile for formation of captives in the world.”

Donald Scott, Financial Secretary, Government of Bermuda

Special Reports /

Insurance, The Jewel In Bermuda's Crown

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