Bermuda has a reputation as a blue-chip offshore jurisdiction. Among other things, it is one of the top reinsurance centres in the world and continues to expand annually. Eighty two new reinsurance companies were established in 2006 and some experts say that Bermuda attracted some $21bn (£10.6bn) of the approximately $31bn (£15.64bn) of capital raised by the insurance industry post-Hurricane Katrina.
One of the key attractions of Bermuda to the insurance industry is its demonstrated commitment to a facilitative yet responsible legislative and regulatory framework that has at its core a risk-based approach.
The risk-based approach recognises that it is necessary to regulate the pure captive insurance company differently from a property and catastrophe reinsurer, and Bermuda categorises its licensed insurers by a class system that imposes different standards accordingly.
In 2006 Bermuda updated its insurance and companies legislation to take into account the world’s best practice and, in the case of its insurance legislation, the standards set by the International Association of Insurance Supervisors (IAIS).
This led to some key changes within the Bermuda insurance industry. Meanwhile, several pending legislative amendments will be particularly relevant to Class 4 property catastrophe risk insurance companies, some of which are capitalised at more than $1bn (£504.61m).
Key changes to insurance laws
The Insurance Amendment Act 2006 introduced some significant changes to Bermuda’s insurance laws. These include:
– New supervisory and investigative powers for the Bermuda Monetary Authority (BMA). These are designed to ensure that the BMA will be able to supervise effectively persons carrying on insurance business in Bermuda and to oversee the registration of insurers, insurance managers and insurance intermediaries (registered persons) under the Insurance Act 1978 and related regulations. The BMA’s investigative powers include the authority to require any person to provide requested information or documents and to enter any premises occupied by that person to obtain such information or documents.
– The BMA is required to apply certain minimum criteria in any decision to approve a registered person for registration under the Insurance Act. A core principle of those minimum criteria is that any person who is to be a controller or officer of a registered person must be ‘fit and proper’ to hold the particular position. In determining whether a person is fit and proper, the BMA is to have regard to the person’s probity, competence and soundness of judgement and whether the interests of clients or potential clients of the registered person are, or are likely to be, threatened by that person holding the position.
– The introduction of the concept of a ‘controller’, which includes: a managing director or chief executive of a registered person; a person in accordance with whose directions the directors or a shareholder controller (defined below) of a registered person are accustomed to act; and a shareholder holding or entitled to exercise at least 10 per cent of the voting shares at a general meeting (shareholder controller).
– Any person planning to become a shareholder controller of an insurance company or to increase their level of control of an insurance company to certain thresholds (broadly speaking, 10 per cent, 20 per cent, 33 per cent and 50 per cent of the company’s voting shares) must give notice to the BMA.
If the insurer is a public company, written notice must be provided to the BMA within 45 days of a person becoming a shareholder controller or increasing their existing shareholding to a control threshold. The BMA may object to a person continuing as a shareholder controller if it appears to the BMA that such person is no longer fit and proper to continue as a shareholder controller.
If the insurer is a private company, written notice must be provided to the BMA before a person becomes a shareholder controller or increases their existing shareholding to a control threshold. The person must not become a shareholder controller or increase their level of control if the BMA notifies the person within 45 days that it has an objection.
The BMA may object to a person becoming a shareholder controller or increasing their level of control to a control threshold if it believes the person is not fit and proper to become a controller, the minimum criteria for registration under the act as a registered person may not continue to be fulfilled, or if the interests of clients or potential clients of the insurer would be threatened by the increase in control.
In both the case of a public company insurer and a private company insurer, the BMA may direct in connection with its objection that, among other things, no voting rights be exercised in respect of the shares. The BMA may also apply to the Bermuda Supreme Court for an order requiring the shareholder to reduce its shareholding.
– The introduction of an appeals tribunal from which BMA decisions to cancel registration of registered persons or requiring removal of controllers or officers can be appealed. Appeals from the tribunal to the Supreme Court can be made on points of law only.
Proposed future changes
IAIS standards are increasingly being adopted by insurance regulators globally. The BMA is a charter member of the IAIS and its insurance regulatory framework is consistent with the framework for risk-based insurance supervision set out by the IAIS.
Consistent with the risk-based approach to insurance supervision, Bermuda imposes higher standards on its Class 4 insurance carriers. The Class 4s have the highest capital requirements and more stringent solvency requirements and must disclose ceded reinsurance. There are also additional financial reporting requirements tied to loss of capital and restrictions on large dividend restrictions.
Although the level of supervision of Class 4 insurers is already rigorous, Bermuda is continuing to strengthen its regulation of its most high-profile insurance companies. For example, the BMA has now fully launched onsite visits of class 4 companies to identify any potential areas of weakness that may, if unchecked, cause problems going forward.
It should be said that the recent changes to Bermuda’s insurance regulatory framework have been embraced by the Bermuda insurance and reinsurance industry. In fact, these changes came about only after in-depth consultation between the regulators and industry.
Bermuda’s legislators and regulators are also looking to develop more comprehensive risk-based solvency capital models appropriate for the Bermuda market. These will enable the BMA to target more precisely the coverage, geographical scope and risk exposure of a particular insurer looking at its specific risk exposure and risk profile.
There are also plans for additional financial reporting for Class 4 insurers to promote greater transparency.
Rod Attride-Stirling is senior partner and Franki Ganter is senior counsel at Attride-Stirling & Woloniecki