The A.R.T. of Reinsurance in Bermuda: Recent Legal Developments

Bermuda is now the home of nearly 1,500 insurance and reinsurance companies with a combined capital base of some $42.5 billion. It is the world's leading domicile for captive insurers and a significant provider of catastrophe reinsurance capacity. Bermuda is also a leading jurisdiction for financial reinsurance and alternative risk transfer. The Bermudian legal system combines the conservative traditions of the English common law (which took root upon Bermudian soil in 1612) and forward thinking legislation designed to meet the needs of international business (see: 'Bermuda is the ideal venue for companies to hold arbitrations', in 'International Arbitration: A Guide for Foreign Corporations' - Supplement to the April 1998 issue of "International Commercial Litigation").

This article describes recent amendments to the Insurance Act 1978 (the 1978 Act) which provide a new legal and regulatory framework for the securitisation of risk. Contracts which provide for the payment of money upon the happening of an event may now be regarded as "designated investment contracts" and statutorily deemed not to be either insurance contracts or wagers. Persons entering into such contracts will not be subject to regulation as insurers.

In a recent press release the Registrar of Companies, Kymn Astwood, described the Insurance Amendment Act 1998 as a unique piece of legislation. Mr. Astwood said:

"Uncertainty as to the legal standing of certain contracts under Bermuda law can adversely affect the ability of companies to raise capital for securitisation deals. For example, linking an investment contract such as a bond to insurance results raises questions about its legal classification. This is important where capital is coming from institutional investors who want to know whether they will be deemed to be conducting business as insurers under Bermuda law."

The Insurance Act 1978: definition of "insurance business"

The 1978 Act provides that any company carrying on "insurance business", in or from Bermuda, must be licensed as an insurer. The 1978 Act defines (Section 1) "insurance business" to mean:

"Ö the business of effecting and carrying out contracts -

a. protecting persons against loss or liability to loss in respect of risks to which such persons may be exposed; or

b. to pay a sum of money or render money's worth upon the happening of an event,

and includes re-insurance business."

It is interesting to compare the Bermudian statutory definition with...