Ocorian, a global leader in corporate and fiduciary services, fund administration and capital markets, has seen a significant increase in the number of captives it supports with its Bermuda offices delivering particularly strong growth.
There are now more than 70 captive domiciles worldwide, but Ocorian believes that given the strength of its proposition, Bermuda will continue to grow its market share. Currently, Ocorian's Bermuda insurance specialists support over 137 Bermuda-registered captive insurance companies, as well as 93 commercial and special purpose insurers.
Growth in the captives market, in general, is being fuelled by a hard insurance market and rising premiums with companies wanting to take greater control over their insurance requirements to make them more affordable and flexible. The number of captive formations nearly doubled in 2020, according to the most recent data from Marsh.
However the Bermuda domicile is increasingly seen as a sophisticated, credible, and legislatively developed jurisdiction, particularly regarding insurance products, both traditional and exotic. The Bermuda Insurance Act is bifurcated into rules that, acknowledging obvious differences, provide for a designated captive framework and one applicable to the larger, more complex commercial insurers.
Ocorian provides a full suite of legal, administration and fiduciary services to the ILS, commercial and captive insurance markets from its Bermuda, Cayman and BVI offices, ensuring that all structures remain compliant with applicable regulations in each jurisdiction.
Sherman Taylor, Head of Capital Markets - Bermuda, Ocorian said: "A well-run captive can be an effective risk management tool, reducing group insurance costs for the captive owner.
"However, the commercial rationale for incorporating and establishing a captive extends beyond profit considerations, and the current insurance hard market cycle has created new industry buzz about captives.
"The ability to influence pricing is a key benefit of owning a captive. Large rate increases were evident in the latest round of insurance renewals, and it is unlikely that rates will come down in the near future as insurance and reinsurance companies are still dealing with the impact of major loss events spanning the past four years. It is highly anticipated that pandemic losses will exacerbate the situation and drive even more interest in captives."
A unique regulatory framework
In 2016, the European Commission deemed Bermuda's prudential standards for commercial insurers to be equivalent to regulatory standards applicable to European insurance companies under the EU's Solvency II Directive. Bermuda is one of only two non-EU jurisdictions to enjoy Solvency II equivalency - an extremely strong onshore endorsement of the jurisdiction. The advantages of being deemed Solvency II equivalent are principally that an insurer can elect to have its home, group regulator as the Bermuda Monetary Authority, which allows Bermuda (re)insurers and groups to conduct business in the EU without additional regulatory requirements and, more importantly, on an even playing field with existing EU insurance companies.
In early 2020, Bermuda was recognised by the Caribbean Financial Action Task Force for its exceptional work to establish an effective framework to combat money laundering and the financing of terrorism and proliferation. In February 2020 the Government of Bermuda confirmed that Economic and Financial Affairs Council (ECOFIN) had graded Bermuda as a 'cooperative jurisdiction' with respect to good tax governance; in turn, Bermuda was upgraded to the 'white list'.
Talent pool and substance
The Bermuda captive market is particularly well developed and consequently attracts and retains human capital talent, necessarily providing captive owners dedicated access in a relatively small area to quality advice and guidance.
Speed to market and balanced, sensible application of rules
Captive insurance is not a one-size-fits-all business and therefore dialogue between regulators and captive owners is essential. Bermuda enjoys regulation by a credible, sophisticated, and knowledgeable regulator in the authority, who have developed, in particular, a team that has broad insurance industry knowledge. As a consequence of which, the jurisdiction is able to provide clear and consistent speed to market for players establishing structures here. The authority's broad knowledge of this particular industry makes them inherently open for dialogue with industry, which is incredibly important to avoid shocks to the market.
Technology, innovation and insurtech
Bermuda embraces technology and innovation, and this is being incorporated into its insurance industry. The authority recently introduced 'sandbox' and 'innovation' amendments to its rules, primarily aimed at insurtech start-ups. These amendments reduce barriers to entry for start-ups with new, untested ideas, and provide an incubator for new insurers with innovative business models needing time to develop. These new rules include appropriate regulatory oversight, time limitations, disclosure requirements and statutory reporting designed to protect policyholders.
Formation and operational consideration
The journey to captive ownership in Bermuda should begin with a feasibility study, involving such techniques as a cost versus benefit analysis, qualitative analysis, and stress testing.
Minimisation of losses is critical, and the captive owner's loss experience history, including frequency and severity of losses, provide valuable insights into the feasibility of a captive. High-frequency, low-severity losses may be more tolerable than low-frequency, high-severity losses, or vice versa. The data analysed will ideally cover five - 10 years' loss experience depending on the type of business written.
If a separate captive is not feasible, other options to consider include insurance pools rent a captive and rent-a-cell programmes that allow insurance business to be written without setting up a separate captive. Another key decision is whether a 'pure captive' is suitable, or if some unrelated business will be written, requiring a different license.
After selecting service providers, the captive owner will need to front initial costs, including legal fees, incorporation fees, licensing fees and other consultation fees. Captives must maintain a minimum capital level, which varies depending on its license. In Bermuda, a single-parent captive writing only related business is required to maintain a minimum capital starting at $120,000. The capital outlay for a captive is important because of the 'cost of capital' to the owner, who may not immediately receive dividends and a return on investment.
As the captive accumulates capital and surplus from profitable operations, it will be able to support additional business, or pay dividends to the captive owner, subject to meeting solvency and minimum capital rules.
To find out more about Ocorian's services to the ILS and captive market visit: https://www.ocorian.com/service/insurance-linked-securities-captive-solutions