Insurance And Reinsurance 2016

Bermuda is home to one of the largest international insurance and reinsurance markets in the world. This article outlines the current regulatory framework for the conduct of insurance and reinsurance business in Bermuda; the law relating to the resolution of insurance claims and coverage disputes; the law relating to reinsurance disputes and arbitration; and key reinsurance principles and practices under Bermuda law.


1 Regulatory agencies

Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.

The Bermuda Monetary Authority (BMA), a body corporate independent of government, determines applications for registration of insurers under the Insurance Act 1978 (the Act), and supervises, regulates and inspects insurers registered under the Act. It has jurisdiction to propose and to bring into effect subsidiary legislation prescribing prudential standards for insurers. It publishes Codes of Conduct setting governance, risk management and business standards with which insurers registered under the Act must comply. It also has a range of enforcement and disciplinary powers.

The Minister of Finance has jurisdiction under the Act to exempt classes of insurance business or to exempt a class of persons from the pro visions of the Act, to determine the value of assets or liabilities for the purposes of the Act, to prescribe information that insurers must report in their regulatory returns, and to prescribe prudential requirements except where the BMA has this authority. The Minister also has jurisdiction under the Non-Resident Insurance Undertakings Act 1967 to grant permits to non-resident insurers, and jurisdiction under the Companies Act 1981 to grant permits to overseas companies allowing them to carry on a range of international business in Bermuda.

Finally, the Registrar of Companies, an emanation of the Finance Ministry, determines applications for registration of companies and maintains a public register of companies incorporated in Bermuda and permit companies.

2 Formation and licensing

What are the requirements for formation and licensing of new insurance and reinsurance companies?

Any person seeking to be registered as an insurer must satisfy the BMA that it will meet 'minimum criteria' scheduled to the Act, will meet the minimum margin of solvency for insurers in their 'Class', that their assets will meet the statutory liquidity ratio for their Class, and, if they are to be registered as a commercial insurer, that they will meet the enhanced capital requirement (ECR) for insurers in their Class.

The minimum criteria are (in summary) that 'officers' and 'controllers' of the insurer are fit and proper persons to perform their functions, that there are in place corporate governance policies appropriate for a business with the nature, size, complexity and risk profile of the insurer, that a minimum of two individuals will effectively direct the business of the insurer, that there will be an appropriate number of non-executive directors on the Board of Directors of the insurer, that the business of the insurer will be conducted in a prudent manner, that there are no 'group' risks that will prevent effective supervision of the insurer by the BMA, and that the business of the insurer will be carried on with integrity and the professional skills appropriate to the nature and scale of the insurer's activities.

The classification of insurers is a key feature of the Bermuda regulatory regime, allowing as it does for graduated levels of regulation of insurers based on their size, complexity and other risk profile features. The most fundamental difference in regulation lies between the regulation of captives and the regulation of commercial insurers. Captives are subject to a less onerous regime than commercial insurers.

However, there are further nuances in regulation within those broad categories, again based on the peculiar risk profiles of different classes of insurer.

Captives themselves are subject to sub-classification into classes reflecting whether they are single-parent (Class 1 for general business captives, Class A for long-term business captives) or multi-parent (Class 2, Class B), and how much 'unrelated' business the captive writes. For example, a Class 1 captive may not write unrelated business, whereas a Class 3 captive may write more than 20 per cent (but less than 20 per cent) unrelated business.

Commercial insurers subdivide into three classes depending on volume of net premiums written from unrelated business (Class 3A or 3B; Class C, D or E) or depending on minimum statutory capital and surplus of the insurer (Class 4, which requires minimum statutory capital and surplus of Bda$100 million). Bermuda's regulation of insurers was determined to be officially equivalent with European Solvency II on 24 March 2016 (when the European Commission's adoption of a Delegated Act recommending full equivalence was confirmed). The regulatory regime applicable to Bermuda captives is not Solvency II equivalent.

Normally, a promoter seeking to a register as an insurer will make a 'pre-incorporation' application made to the BMA, which must include details of the proposed controllers of the body corporate, a business plan and a five-year financial projection, and other materials. A separate, parallel application must be made to the Registrar of Companies seeking to register the body corporate.

3 Other licences, authorisations and qualifications

What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?

A person must be registered by the BMA as an insurer if they intend to carry on insurance business in or from within Bermuda. Exactly what insurer licence they require will be determined in the first instance by whether the insurer is to be a captive insurer or commercial insurer (see question 2).

A third category (in addition to captive insurers and commercial insurers) of insurer is the 'special purpose insurer', which writes insurance business under which an insurer fully funds its liabilities to persons insured through the proceeds of a subordinated debt issuance or other financing approved by the BMA, cash and time deposits.

Insurers may be local companies (at least 60 percent of their share capital is owned and controlled by Bermudians), exempted companies (which may be owned and controlled by international controllers) or permit companies (companies incorporated overseas and granted a permit by the Minister of Finance to carry on a limited ranged of international business in Bermuda).

4 Officers and directors

What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?

Controllers must be fit and proper persons to discharge their functions as controllers. A proposed director or officer must have relevant expertise, sufficient skills, knowledge and soundness of judgement properly to undertake and fulfil the particular duties and responsibilities of his office.

The BMA will also consider whether the officer will devote sufficient time and attention to his or her duties and responsibilities necessary to fulfil those duties and responsibilities diligently. In assessing soundness of judgement, the BMA looks to inter alia the degree of balance, rationality and maturity demonstrated in the proposed officer's previous conduct and decision-taking. The BMA also regards the probity of the proposed officer, particularly a person proposed to be the chief executive officer or managing director of the insurer.

Although it need not be in the possession of the board of directors, the insurer must have or have available to it, 'adequate knowledge and expertise'.

The board of directors of a captive insurer, especially a single-parent captive insurer, will frequently not possess the necessary skills and experience to conduct the business of the insurer unaided. In that instance, it is common for the insurer to appoint an insurance manager to whom senior functions of the insurer will be outsourced.

5 Capital and surplus requirements

What are the capital and surplus requirements for insurance and reinsurance companies?

Insurers must maintain assets equal to a minimum margin of solvency. For captives carrying on general business, the minimum margin of solvency is calculated by reference the greater of net written premiums and discounted loss reserves and other insurance reserves, subject to a minimum floor of Bda$120,000. For commercial insurers, it is the greater of the aggregate of 20 per cent of net written premiums up to Bda$6 million and 15 per cent of new written premiums thereafter, 15 per cent of assets reported on the insurer's statutory financial statement, and 25 per cent of the insurer's ECR, subject to a floor of Bda$1 million for Class 3A...

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