Bermuda Captive Breakfast SeminarPhiladelphia Marriott Downtown
Philadelphia
May 18, 2010
Moderator Scott Gemmell
Why companies form captives Thomas McMahon
Latest ideas in captive use Susan Lane
How to form a Bermuda captive Brad Adderley
Captive Tax Update Bill BaileyKarey Dearden
Bermuda’s captive regulation Shelby Weldon
Why Companies Form Captives
Thomas McMahonPresidentCedar Management Limited
• What is a Captive
• Types of Captives
• Why form a Captive
Topics
• Insurance subsidiary of a commercial/financial company, or a consortium or an association of individuals
• Formed to primarily insure or reinsure the risks of its parent, or of a number of parties with risks in common or unrelated risks
• Usually formed in a specialized environment or “domicile” – “onshore” or “offshore”.
What is a Captive?
• Single Owner
• Multi-owner or Association
• Rent-a-Captive – multiple non-owner
• Protected or Segregated Cell Captive (PCC, SPC SAC) – any of the above
Types of Captive
Why Form a Captive?
1. Information and Control
2. Risk Management Focus
3. Additional Capacity
4. Direct Market Access
5. Flexibility in Program Design
6. “Uninsurable” Risk
7. Financial Stabilizing
8. Profit Centre
1. Information and Control• Influence program design and cost through progressive retentions
• Reliable data for reinsurance purposes
• May assist with rating requirements
• Access to loss data/reserving practice
• Claims handling control• Image preservation• Avoidance of legal precedents• Out of court settlements• Negative publicity management• Damage limitation
2. Risk Management Focus
• As a separate subsidiary of the business, focuses senior management attention on risk.
• Risk manager can use risk management ranking methods to influence premium allocation to business units/divisions
• Use captive surplus to fund risk improvements
• Ring-fence risk funding
• Use contributions to fund loss control projects
3. Additional Capacity• Can act as a direct insurer (where permitted)• Can act as a reinsurer behind a fronting company• Provides insurance coverage through fluctuating insurance cycles = price stabilization• Reduces the dependency for obtaining risk transfer through commercial markets• Strategic layer completion e.g.
• Left with a gap unable to complete property layer at lead underwriter premium• Captive used to write the gap at lead underwriter premium thereby completing the layer• Captive purchased reinsurance at a higher premium, but integrity of pricing for rest of the layer was maintained• Saved the increase layer pricing for the benefit of the insured
4. Direct Market Access
• Allows direct access to reinsurance markets & ART markets
• Wholesale market cheaper than direct markets
• Reinsurance markets less regulated, wider range of solutions – better program design
• May reduce/eliminate brokerage fees
• Collection of reinsurance commissions
5. Flexibility in Program Design
• Acts as a negotiating tool in coverage and pricing with markets
• Allows for customized covers, broader wordings, “manuscript” policy forms
•Coordination of insurance programs throughout multiple jurisdictions: (DIC/DIL covers, global programs)
6. “Uninsurable” Risk
• Such exposures carried on balance sheet
• Create capacity above captive retention
• Can become tax-deductible premium expense
• Transfer liability off balance sheet
• Turn a cost center into a potential profit center – e.g. gradual environmental pollution
7. Financial Stabilizing
• Insulates owner from withdrawal of capacity by conventional markets: pollution, asbestos, flood, windstorm, terrorism…
• Uses its capacity and reservoir of earnings to stabilize premiums during harder markets
• Allows access to multi-year ART programs to spread losses across time
• Dividend release can be harmonized with parent’s capital needs to reduced debt/equity ratios, tax loss offset…
8. Profit Centre
• “Offensive” not “defensive” use
• Attract related third party business, e.g. customer insurance programs
• Diversify risk in captive
• One corporate vehicle to measure risk management performance
Latest ideas on Captive use
Susan LaneVice PresidentAon Global Insurance Managers
• Continued soft market
• Interest rates low
• Below average ROI
• Inflation on the rise
• Cash/liquidity still an issue
• Restricted credit, squeeze on collateral
Current Environment
• Incorporations continue
• Potentially tighter regulations introduced
• Economic situation driving strategic review and uses
• Owners are:– identifying untapped potential cost-saving mechanisms– increasing retentions– accessing excess capital– considering new lines of coverage
Current Captive Market
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
# of
Glo
bal
Cap
tive
sGlobal Captive Market Growth
Risk Transfer
Corporate Discipline
Tax Strategy
Reinsurance
Marketplace
FinancialR
isks
Allocation
E-Commerce Risks
Loss Reduction
Acquisitions
New Product Offerings
RiskRetention
Liquidity
Most Common Uses
Traditional Captives• Traditional risks e.g. WC; Auto; GL; • Long tail covers seeking tax advantages• Typically $1m+ in expected losses
New Captives
• Used to create income e.g. selling insurance on products (cell phones, extended warranties, tenants insurance)
• Used to resolve problems e.g. lack of capacity/rising costs for Californian earthquake
• Used to insure the uninsurable e.g. emerging liabilities for high tech companies, products liability for pharmaceutical
• Used to enhance cover e.g. employee benefits
Common Uses
• Trade credit
• Legacy liabilities
• Non-US employee benefits
• Customer/Supplier risk
• Group captive participation
• Segregated account conversions
• 831(b) formations
• Wealth management/transfer
Latest Uses
• Usually lowers cost of insurance
• Risk sharing may provides tax benefits
• Owners benefit from returned premiums (dividends) after a defined period
• Group meetings can create beneficial forum discussions
Group Captive Participation
• Use captive to provide customers/suppliers with insurance capacity
• Insulate risks
• Isolate run-off or legacy risks from current risk portfolio
• Asset protection
Segregated Account Conversions
• Commonly known as “Wealth Captives”
• Premiums below $1.2m then election opts not to pay income tax on the underwriting profit (have to pay on investment income)
• Purpose is to allow start up companies the opportunity to get established
• The entity MUST qualify as an insurance company for tax purposes to take this election
• Captives in common ownership are added together to see if $1.2m is exceeded
831 (b) Captives
• Use of a captive to transfer wealth between generations through structuring captive ownership
• Applicable to privately held companies only
• Can be a tax effective way of transferring wealth
• Underwriting profit is received by heirs, not business owners
Wealth Management/Transfer
Trust 1
Grandson
Trust 2
Granddaughter
Auntie Mabel
InheritanceCaptive
Ltd.
Pops Co. 1
Pops Co. 2
Pops Co. 3
Pops Co. 4
Pops Co. 5
Pops Co. 6
Pops Co. 7
Pops Co. 8
OwnCaptive
Pay premiumsto Captive
PaysDividend
Wealth Management/Transfer:Example 1
Trust 1
Grandson
Trust 2
Granddaughter
Auntie Mabel
InheritanceCaptive
Pops Co. 1
Pops Co. 2
Pops Co. 3
Pops Co. 4
Pops Co. 5
Pops Co. 6
Pops Co. 7
Pops Co. 8
No Claims$1m
Dividend
$1m
CaptiveTakes831(b)election
Shareholders paytax at their applicable
rate
Insured deductspremium as expense(Tax Saving $350k)
Wealth Management/Transfer:Example 2
• Understand the capacity and appetite to assume more risk
• Determine future expected losses
• Gauge market response
* Consider the Total Cost Of Risk *
Program Design Consideration
• Indications that P&C market will stay soft
• Organizations continue to assess the value of every $ spent
• Focus on optimizing risk
• Evaluate placing less coverage in the commercial insurance market and increasing retentions
• Combat high cost and availability of collateral
• Increase in global regulation
2010 Outlook
Captives as a strategic risk financing tool are continuing to evolve and deliver benefits to the parent company in
many areas, not just insurance and tax.
Conclusion
How to Form a Captive
Brad AdderleyPartnerAppleby
Preparation
Receive Client Instruction
Completion of Client Questionnaire
Reservation of Name
Registrar of Companies
Engagement Letter & Retainer
KYC
Insurance SubmissionSimultaneously Submit to:
Incorporation Submission
Registrar of Companies; and Bermuda Monetary Authority:
Authorisation and Compliance Division
Insurance Submission
Bermuda Monetary Authority: Insurance Division Assessment & Licensing Committee (ALC) Technical Advisory Group (TAG)
Insurance Submission
Business Plan
Pre-incorporation Information Form
Five Year Financial Projections
Director Information
Shareholder Information
Supporting Documentation
Incorporation
Bermuda Monetary Authority
Issue consent to incorporate
Registrar of Companies
Apply to incorporate
Immediately; or
Delay incorporation for up to six months from the date the
consent is issued
BMA Review Process
Shareholders
Provide more information on owners
Ap
pro
ved
Rejected
Rejected
Review of Application by
ALC & BMA Insurance Division
Request more information until satisfied
Foreign Exchange
letter issued to Registrar
of Companies
Incorporate Company
Insurance Program
Organisation
Review funds to pay up the minimum authorised share capital
Convene initial meetings
Provisional Directors Meeting Statutory Meeting First Board of Directors Meeting
Insurance Licensing
Apply for insurance license
Form 1B
Service Providers
Capital
NB: License will be issued as of the date of application
Commence writing business from the date that the license application is submitted
Post Organisation
Service Providers:
Corporate Secretary
Principal Representative/Insurance manager
Auditor
Loss Reserve Specialist
Banks
Bill BaileySr. Manager & Tax LeaderErnst & Young, Bermuda
Karey DeardenSr. Manager FSO InsuranceErnst & Young, New York
Captive Tax Update
Current Environment
► CFOs are constantly looking for ways to improve cash flow, to reduce expenses and to maximize the use of capital.
► CFOs and Risk Managers are seeking to maximize coverage options while reducing the overall cost of risk.
► Tax Directors of inbound organizations are exploring methods to move funds within the global organization in a tax efficient manner.
Potential Benefits of a Captive Insurance Arrangement
A properly structured captive insurance arrangement may provide the following benefits:
► Expense reduction leading to improved cash flow
► Minimizing capital to fund certain risk exposures by pooling risks
► Centralized management of risk within an organization
► A vehicle to move funds within a global organization in a tax efficient manner
► A profit center for accepting profitable third-party insurance business
How is this accomplished?
► Reserves for retained risks are not deductible for U.S. Federal income tax purposes.
► Insurance premiums paid to a properly structured captive insurance company to fund retained risk should be deductible.
► A captive insurance company can set up deductible insurance reserves.
► A pool of risks is less volatile than a single risk, so less capital is needed to support risk exposures.
► Certain third-party insurance business, e.g., extended warranty insurance, may be profitable business thereby creating a profit center.
► Insurance premiums can generally be paid across borders to fund risk exposures.
► “Insurance” is neither defined in the statute nor the Treasury regulations.
► Judicial precedent provides the following framework for evaluating whether a scenario is an insurance arrangement (LeGierse):► Presence of insurance risk► Risk shifting► Risk distribution► Commonly accepted notions of insurance
► Three Common Structures► Parent/Subsidiary (Carnation, Clougherty Packing)► Brother/Sister (Humana, Kidde, Malone)► Third-party risk (AMERCO, Harper, Sears)
Definition of Insurance for U.S. Federal Income Tax Purposes
Definition of Insurance for U.S. Federal Income Tax Purposes
Parent/Subsidiary
Premiums
Parent has not shifted its risk to Captive. Balance sheet approach
Premiums paid from Parent to Captive are not deductible.
Captive is not considered an insurance company.
Parent
Captive
Definition of Insurance for U.S. Federal Income Tax Purposes
Brother/Sister
Parent
Parent has not shifted its risk to Captive. Balance Sheet approach
Premiums paid from Parent to Captive are not deductible.
Subs
Subs generally shift risk to captive.
Premiums paid from Subs to Captive are generally deductible provided certain bona fides are satisfied: premiums are arm’s length, the Captive is adequately capitalized, and the Captive is not propped up.
Captive
Generally treated as an insurance company.
Parent
Subs CaptiveSubs
Premiums
Premiums
Definition of Insurance for U.S. Federal Income Tax Purposes
Third-Party Risk
Parent
Parent generally shifts its risk to Captive, provided sufficient third-party risk is present. Third-party risk benchmark > 30% of total premium
Premiums paid from Parent to Captive are generally deductible, provided bona fides are satisfied.
Subs
Subs generally shift risk to Captive.
Premiums paid from Subs to Captive generally deductible, provided bona fides are satisfied.
Captive
Generally treated as an insurance company.
Parent
Subs CaptiveSubs
Third-party Risk Premiums
Premiums
Premiums
ExamplesForeign Parent
Subs CaptiveNon US DomicileU.S. Subs
* Premiums
* Note: U.S. federal excise tax likely to apply.
Summary
Scenario should qualify as a brother/sister insurance arrangement provided the bona fides are present.
Premiums paid from U.S. Subs to Captive should be deductible.
Captive should be treated as an insurance company for U.S. federal tax purposes.
Primary Benefits
Capital is minimized by pooling risks.
Management of risk is centralized.
U.S. federal and state tax deductions should be accelerated creating increased cash flow.
Investment earnings not subject to U.S. federal or state taxation.
Funds are moved from the U.S. to a tax efficient jurisdiction of the Foreign Parent.
Examples
Summary
Scenario should qualify as a Third-Party risk arrangement provided the bonafides are present.
Premiums paid from U.S. Subs to Captive should be deductible.
Captive should qualify as an insurance company for U.S. federal income for purposes.
Primary Benefits
Captive acts as a profit center for profitable third-party insurance risks, e.g. extended warranty.
Capital is minimized by pooling risks.
Management of risk is centralized.
U.S. federal and state tax deductions should be accelerated creating increased cash flow.
Investment earnings not subject to U.S. federal or state taxation.
Funds are moved from the U.S. to a tax efficient jurisdiction of the Foreign Parent.
Foreign Parent
Subs CaptiveNon U.S. DomicileU.S. Subs
Fronting Company Customers’ Premium
Third-party reinsurance premiums30% of total premium in Captive
*Note: U.S. federal excise tax likely to apply*Premiums
Tax Update
RECENT
CHANGES
• The IRS announced on January 26, 2010 a proposal that would require certain businesses to provide information about their uncertain tax positions identified in their accounting statements; e.g. FIN 48 (primarily codified in ASC 740-10).
• The Service intends the new schedule to be filed by a business taxpayer with total assets in excess of $10 million if the taxpayer has one or more uncertain tax positions.
• Schedule will be filed with Form 1120, U.S. Corporation Income Tax Return, or other business tax returns.
Uncertain Tax Position Disclosure
• The Schedule will require - A concise description of each uncertain tax position for
which the taxpayer or a related entity has recorded a reserve
- The maximum amount of potential federal tax liability attributable to each position (determined without regard to the taxpayer’s risk analysis of its likelihood of prevailing on the merits).
• “Concise” and “Maximum tax liability” are further embellished.
• Comments are due by June 1, 2010
Uncertain Tax Position Disclosure
Uncertain Tax Position Disclosure
• Announcement 2010-30– IRS unveils draft Schedule UTP, Uncertain Tax Position
Statement, and instructions– For each identified uncertainty, calculation of the MTA
(Maximum Tax Adjustment) will be required on an annual basis:
• The draft instructions provide a detailed description of how to calculate the MTA
• For transfer pricing and valuation positions, can use a “ranking” approach
– A response on the question of penalties is outstanding, however one option is to seek legislation from Congress to impose new penalties for failure to file the form or to make adequate disclosures.
United States v. Textron Inc.
• First case to test the new aggressive position the IRS is taking regarding the request for tax accrual workpapers.
• The First Circuit vacated the district court’s determination that a public corporation’s tax accrual workpapers were protected from IRS summons by the work-product doctrine.
• The First Circuit held that the work-product privilege was not implicated with regards to the taxpayer’s tax accrual workpapers, because it found that the work papers were not prepared “for” litigation and were thus required to be produced pursuant to an IRS administrative summons.
• Next Step: Currently before Supreme Court on a petition for certiorari
Excise Tax – Cascading Theory
• Section 4371 of the Code imposes an excise tax on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by any foreign insurer or reinsurer
• Revenue Ruling 2008-15 describes the insurance excise tax consequences of insurance premiums paid by one foreign (re)insurer to another• Conclusion: The reinsurance excise tax on reinsurance
policies covering contracts under IRC Section 4371 applies to reinsurance premiums paid by one foreign (re)insurer to another, unless the payee issuing the policies was itself exempt per treaty
Codification of Economic Substance
• The “economic substance” doctrine (IRC 7701(o))
• Revisited as part of the Health Care and Education Affordability Reconciliation Act of 2010 (H.R. 4872)• States that “in the case of any transaction to which the
economic substance is relevant, such transaction shall be treated as having economic substance only if:
• (a) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
• (b) the taxpayer has a substantial purpose (apart from federal income tax effects) for entering into such transaction.”
Risk Shifting & Risk Distribution
• Revenue Ruling 2009-26: Illustrates applying insurance principles to reinsurance arrangements
• 2 situations:– (a) Company A reinsures multiple policies with Company
B (Company B writes no other business)– (b) Company A reinsures 1 policy with Company B
(Company B writes additional policies with other companies)
• Conclusion: Company B qualified as an insurance company per IRC Section 831 and both situations are considered to be insurance arrangements in the conventional sense as there was appropriate risk shifting and risk distribution.
Bermuda’s Captive Regulation
Shelby WeldonDirector, Insurance Licensing & AuthorisationBermuda Monetary Authority
Bermuda’s Captive RegulationOutline
• Legislation
• Other Guidance
• Class Structure
• Ratios & Margins
• Annual Business Fess
• Bermuda Markets
• Supervisory Model & Risk-Based Framework
• Regulatory Approach
• International Update
• Proposed Enhancements
• Statistics
• Insurance Act 1978
• Insurance Accounts Regulations 1980
• Insurance Returns & Solvency Regulations 1980
• Non-Resident Insurance Undertaking Act 1967
• Segregated Accounts Companies Act 2000
Bermuda’s Captive Regulation
Guidance Notes:
20 separate Guidance Notes issued to date:
• Role of service providers
• Market Conduct
• Corporate Governance
• Risk Management and Internal Controls
• Investment Activity
• Investments in Affiliates
• Enhanced Capital
• Special Purpose Insurers
Bermuda’s Captive Regulation
Code of Conduct
• Establishes duties, requirements and standards to be complied with by insurers including the procedures and sound principles to be observed;
• Application will take into account the insurer’s nature, scale and complexity
• Captive insurers should be mindful of the proportionality principle in establishing a sound corporate governance, risk management and internal controls framework.
Bermuda’s Captive Regulation
CLASS 1
A body corporate is registrable as a Class 1 insurer where that body corporate:-a) is wholly owned by one person and intends to carry on
insurance business consisting only of insuring the risks of that person; or
b) is 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 its own shareholders
Bermuda’s Captive Regulation
CLASS 2
A body corporate is registrable as a Class 2 insurer where that body corporate is wholly owned by two or more unrelated persons and intends to carry on insurance business not less than 80% of the net premiums written in respect of which will be written for the purpose of:-a) insuring the risks of any of persons or of any affiliates of
any of those persons; orb) Insuring risks which, in the opinion of the Authority, arise
out of the business or operations of those persons or any affiliates of any of those persons.
Bermuda’s Captive Regulation
CLASS 2
A body corporate is registrable as a Class 2 insurer where that body corporate would be registrable as a Class 1 insurer but for the fact that:-
a) 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 in (a) or (b) above; or
b) it intends to carry on insurance business not less than 80% of the net premiums written in respect of which will, in the opinion of the Authority, arise out of the business or operations of the person by whom it is owned or any of the affiliates of that person.
Bermuda’s Captive Regulation
CLASS 3
A body corporate is registrable as a Class 3 insurer where that body corporate is not registrable as Class 1, Class 2, Class 3A, Class 3B, Class 4 insurer or Special Purpose Insurer
CLASS 3A
A body corporate that intends to carry on insurance business in circumstances where (a) 50% or more of the net premiums written; or (b) 50% or more of the loss and loss expense provisions represent unrelated business
A body corporate to which this section applies is registrable as a Class 3A insurer if its total net premiums written from unrelated business are less than $50 million.
Bermuda’s Captive Regulation
CLASS 3B
A body corporate that intends to carry on insurance business in circumstances where (a) 50% or more of the net premiums written; or (b) 50% or more of the loss and loss expense provisions represent unrelated business.
A body corporate to which this section applies is registrable as a Class 3A insurer if its total net premiums written from unrelated business are $50 million or more.
Bermuda’s Captive Regulation
CLASS 4
A body corporate is registrable as a Class 4 insurer where –
a) 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 then $100 million; and
b) it intends to carry on insurance business including excess liability business or property catastrophe reinsurance business
Where a body corporate is registrable as a Class 4 insurer it shall not be so registered if it is also registrable as a Class 1 or Class 2 insurer.
Bermuda’s Captive Regulation
Special Purpose Insurers
• Any insurer that carries on “special purpose business”
• “Special purpose business” means insurance business under which an insurer fully funds its liabilities to the persons insured througha) the proceeds of any one or more of the following –
i. a debit issuance where the repayment rights of the providers of such debt are subordinated to the rights of the person insured; or
ii. some other financing mechanism approved by the Authority
b) cash; andc) time deposits.
Bermuda’s Captive Regulation
Long-Term BusinessInsurance business of any of the following kinds, namely, -
a) Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life;
b) Effecting and carrying out contracts of insurance against risks of the persons insured sustaining injury as a result of an accident or of an accident of a specified class or dying as the result of an accident or of an accident of a specified class or becoming incapacitated or dying in consequence of disease or disease of a specified class, being contracts that are expressed to be in effect for a period of not less than five years or without limit of time and either not expressed to be terminable by the insurer before the expiration of five years from the taking effect thereof or are expressed to be so terminable before the expiration of that period only in special circumstances therein mentioned, but does not include excepted long-term business;
Bermuda’s Captive Regulation
Long-Term Business
c) effecting and carrying out contracts of insurance, whether effected by the issue of policies, bonds or endowment certificates or otherwise, whereby in return for one or more premiums paid to the insurer a sum or a series of sums is to become payable to the persons insured in the future, not being contracts such as fall within either paragraph (a) or (b), but does not include excepted long-term business or special purpose business.
Bermuda’s Captive Regulation
Class 1
• Related party business only
• General Business Solvency Margin = $120,000
• Minimum Solvency Margin Test – Net Premiums – 20% of first $6 million, 10% on balance – Loss Reserves – 10%
• Minimum Liquidity Ratio – Value of “relevant assets” shall not be less than 75% of “relevant liabilities”
• No requirement to file the opinion of an Approved Loss Reserve Specialist.
Bermuda’s Captive Regulation
Class 2
• Not less than 80% related party business
• General Business Solvency Margin = $250,000
• Minimum Solvency Margin Test – Net Premiums – 20% of first $6 million, 10% on balance – Loss Reserves – 10%
• Minimum Liquidity Ratio – Value of “relevant assets” shall not be less than 75% of “relevant liabilities”
• Must file the opinion of an Approved Loss Reserve Specialist every third year.
Bermuda’s Captive Regulation
Class 3
• Not less than 51% related party business
• General Business Solvency Margin = $1,000,000
• Minimum Solvency Margin Test – Net Premiums – 20% of first $6 million, 15% on balance – Loss Reserves – 15%
• Minimum Liquidity Ratio – Value of “relevant assets” shall not be less than 75% of “relevant liabilities”
• Must file the opinion of an Approved Loss Reserve Specialist annually.
Bermuda’s Captive Regulation
Annual Business Fees:
Class 1: $971.00
Class 2: $1,737.00
Class 3: $10,500.00
Other Regulatory Requests: $210.00 to $525.00.
Bermuda’s Captive Regulation
• Captive vs. Commercial
• Risk-Based Approach
• Statutory Financial Returns
• Role of Principal Representative and Insurance Manager
• Captive Manager On-sites
• Segregated Accounts Companies (Rent-a-Captives).
Bermuda’s Captive Regulation
Supervisory Model & Risk-Based Framework
• Supervisory Model allows us to respond to the increasingly complex and diverse insurance marketplace
• Focusing our resources to areas where there is an increased likelihood of a risk occurring
• A critical element of the Supervisory Model is our Risk-Based Framework.
Bermuda’s Captive Regulation
• Looks at risk-based on two dimensions – Impact and Likelihood
• Impact – “what would happen if a risk crystallized”
• Likelihood – “what are the chances of a risk crystallizing”
• Our Framework encompasses an “impact hierarchy” and a “likelihood filter”.
Risk-Based Framework
Bermuda’s Captive Regulation
Risk-Based Framework – Objectives
• Carry out legislative responsibilities;
• Observe and adhere to international standards;
• Allocate resources to where risk is most pertinent;
• Detect problems at an early stage and take regulatory action on a timely basis; and
• If an insurer fails, to either return insurer to compliance or effect a timely and effective exit from the market.
Bermuda’s Captive Regulation
Pragmatic Approach to Regulation
• “The World’s Risk Capital”
• Creativity and Innovation
• Section 56 Directions– Modifying accounting regulations– Approving “relevant assets”– Admitting assets– Modifying filing requirements
• Regulations consistent with International Standards but applied appropriately for Bermuda Market.
Bermuda’s Captive Regulation
International Initiatives:• Monitoring and Actively Contributing to International Regulatory
Developments
• International Association of Insurance Supervisors (“IAIS”)– Member of IAIS Executive Committee– Chair the Reinsurance Transparency Group– Authority staff are on a total of 13 IAIS Committees
• Solvency II– Capital Adequacy, Group Supervision, Disclosure & Transparency– Bermuda seeking Solvency II equivalence
• Captive regime is already in accordance with international standards, however, we continue to monitor any global developments relevant to captives.
Bermuda’s Captive Regulation
Enhancements:
• Bermuda Solvency Capital Requirement (“BSCR”) – standard capital model
• Internal Model Review
• Group-Wide Supervisory Regime
• Commercial Insurer Solvency Assessment (“CISA”) – which reflects Solvency II Own Risk and Solvency Assessment (“ORSA”)
• Eligible Capital
• Proportionality Principle.
Bermuda’s Captive Regulation
Class Gross Premium Written
Assets Statutory Capital
Class 1 $3,277,232,857 $15,603,815,853 $10,135,083,342
Class 2 $7,858,056,496 $38,517,761,793 $15,134,032,557
Class 3 $18,357,875,391 $69,874,966,928 $24,279,833,021
Bermuda’s Captive Regulation
WWW.BMA.BM
Bermuda’s Captive Regulation
Questions
Bermuda Market Solutionswww.bermuda-insurance.org
Bermuda Captive Owners Associationwww.bcoa.bm/documents.asp