Chambers Insurance & Reinsurance Guide 2023: Bermuda

• Law Firm: Appleby
• Subject Matter: Insurance, Insurance Laws and Products, Reinsurance
• Author: Mr Cameron Adderley, Alan Bossin, Matthew Carr, Timothy Faries, Gary Harris, Josephine Noddings, Amber Farrington and Melinda Mayne
• Published date: 27 January 2023

This guide provides the latest information on sources of insurance and reinsurance law, overseas-based insurers or reinsurers, making an insurance contract, intermediary involvement, alternative risk transfer (ART) transactions, warranties, conditions precedent, insurance disputes and insurtech.

1. BASIS OF INSURANCE AND REINSURANCE LAW

1.1 SOURCES OF INSURANCE AND REINSURANCE LAW

The principal legislation governing companies in Bermuda is the Companies Act 1981, as amended (the 'Companies Act'), under which the majority of companies in Bermuda are incorporated by registration.

In addition to the Companies Act, (re)insurance companies and (re)insurance intermediaries in Bermuda are also governed by the provisions of the Insurance Act 1978 and related regulations, rules and guidance notes, each as amended from time to time (the 'Insurance Act'), which applies to any person carrying on insurance business in or from within Bermuda. 'Insurance business', which includes that of reinsurance, is the business of effecting and carrying out contracts to:

• protect persons against loss or liability to loss in respect of risks to which they may be exposed; or
• pay a sum of money or render money's worth on the occurrence of a loss event.

Insurers in Bermuda should also be aware of the provisions of the Life Insurance Act 1978 (the 'Life Act'), the Segregated Accounts Companies Act 2000 (the 'SAC Act'), the Incorporated Segregated Accounts Companies Act 2019 (the 'ISAC Act') and the Non-Resident Insurance Undertakings Act 1967 (each as amended), as applicable.

2. REGULATION OF INSURANCE AND REINSURANCE

2.1 INSURANCE AND REINSURANCE REGULATORY BODIES AND LEGISLATIVE GUIDANCE

BERMUDA'S REGULATOR

The Bermuda Monetary Authority (BMA) has a legal authorisation and compliance division, which vets the ownership of all entities incorporating or forming in Bermuda and liaises with the various divisions within the BMA to ensure compliance. The BMA carefully scrutinises the ownership of these entities, requiring information on the direct, intermediate and ultimate owners. The BMA must be satisfied that the persons who wish to own/control such entities are persons of integrity and good standing.

In applying a risk-based regulatory approach, the BMA first employs a framework that assesses the nature, scale and complexity of entities seeking to conduct business in Bermuda, their related risk and the level of sophistication of the clients involved. It then supervises them accordingly.

For commercial (re)insurers, the BMA established a risk-based capital model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalisation. This is termed the Bermuda Solvency Capital Requirement (BSCR) or an in-house (re)insurer solvency capital model approved by the BMA. The BSCR model is a risk-based capital model that provides a method for determining an insurer's capital requirements (statutory capital and surplus) by taking into account the risk characteristics of different aspects of the insurer's business.

The BMA introduced prudential standards in relation to all commercial (re)insurers' enhanced capital requirement (ECR). The ECR is equal to the higher capital and surplus requirement of the BSCR or that company's approved internal model. To enable the BMA to better assess the quality of the commercial (re)insurer's capital resources, applicable (re)insurers are required to disclose the makeup of their capital in accordance with the 'three-tiered capital system'. In order to minimise the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA expects that such insurers operate at or above a threshold capital level, which exceeds an insurer's ECR.

Under this system, all of the (re)insurer's capital instruments will be classified as either basic or ancillary capital, which in turn will be classified into one of three tiers based on their 'loss absorbency' characteristics.

Highest quality capital will be classified as Tier 1 capital and lesser quality capital will be classified as either Tier 2 capital or Tier 3 capital. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3 capital may be used to support the insurer's solvency margins and ECR.

While not specifically referred to in the Insurance Act, the BMA has also established a target capital level (TCL) equal to 120% of its ECR. While an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA. Failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight.

Any (re)insurer that fails to comply with its ECR must, at the point that the directors become aware of such failure or have reason to believe that such failure has occurred, immediately notify the BMA and then within 14 days file a written report containing the particular circumstances that lead to the failure and outlining their plan (including actions to be taken and indicative timeline) on how they intend to rectify the failure.

Additionally, and subject to any legislation to the contrary, any insurer that fails to comply with their ECR is prohibited from declaring and paying dividends until the failure has been rectified with the BMA.

CATEGORIES AND CLASSES OF INSURERS

The Insurance Act distinguishes between insurers carrying on the following activities.

• Long-term business, which consists of insurance contracts covering life, annuity, accident and disability risks and certain other types of contract. This does not include 'excepted long-term business' (as defined in the Insurance Act).
• Insurers carrying on general business - ie, any insurance business that is not long-term or special purpose. General business includes accident and disability policies and having been in effect for less than five years.
• Insurers carrying on special-purpose business, including that under which an insurer fully funds its liabilities to its insureds through the proceeds of a debt issuance, cash, time deposits or other financing mechanism. Long-term business consists of insurance contracts covering life, annuity, accident and disability risks and certain other types of contracts.

There are eight general business classifications (Classes 1, 2, 3, 3A, 3B, 4, IGB and IIGB), six long-term business classifications (Classes A, B, C, D, E and ILT) and three classifications of restricted special-purpose insurer, unrestricted special-purpose insurer and the collateralised insurer (SPIs), which can be classified as either general business or long-term business.

Insurers are sub-divided into three categories:

• captive insurers (Classes 1, 2, 3, A and B) ('Captive Insurers');
• commercial insurers (Classes 3A, 3B, 4, C, D and E) ('Commercial Insurers'); and
• special-purpose and collateralised insurers.

The IGB, IIGB and ILT categories can be either captive or commercial insurers.

In general, insurers proposing to carry on general business will be registered as follows.

Class requirements

A Class 1 insurer is:

• wholly owned by one person and intends to carry on insurance business consisting only of insuring the risks of that person or
• an affiliate of a group and intends to carry on insurance business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders.

A Class 2 insurer is wholly owned by two or more unrelated persons and intends to carry on insurance business in respect of which not less than 80% of the net premiums written will be written for the purpose of either of the following.

• Insuring the risks of any of those persons or of any affiliates of any of those persons.
• Insuring the risks which, in the BMA's opinion, arise out of the business or operations of those persons or any affiliates of any of those persons, or are registrable as a Class 1 insurer, but for the fact that
  • not all of the business which it intends to carry on, but at least 80% of the net premiums written, will consist of the business described under the requirements for a Class 1 insurer; or
  • it intends to carry on insurance business in respect of which not less than 80% of the net premiums written will, in the BMA's opinion, arise out of the business or operations of the person by whom it is owned or any of the affiliates of that person.

A Class 3 insurer is not registrable as a Class 1, Class 2, Class 3A, Class 3B, Class 4 insurer or special-purpose insurer.

A Class 3A insurer intends to carry on insurance business in circumstances where:

• 50% or more of the net premiums written, or 50% or more of the loss and loss expense provisions, represent unrelated business and
• total net premiums written from unrelated business are less than BMD50 million.

A Class 3B insurer intends to carry on insurance business in circumstances where:

• 50% or more of the net premiums written, or 50% or more of the loss and loss expense provisions, represent unrelated business and
• total net premiums written from unrelated business are BMD50 million or more.

A Class 4 insurer:

• has total statutory capital and surplus of not less than BMD100 million; and
• intends to carry on insurance business including excess liability business or property catastrophe reinsurance business.

A Class IGB insurer intends, at the time of its registration, to carry on general business in an innovative and experimental manner whereas a Class IIGB insurer intends to carry on business in an innovative manner.

LONG-TERM BUSINESS

In general, insurers proposing to carry on long-term business will be registered as follows.

Class requirements

A Class A insurer is:

• wholly owned by one person and intends to carry on long-term business consisting only of insuring the risks of that person; or
• an affiliate of a group and intends to carry on long-term business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders.

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