As the oldest captive domicile, Bermuda is well positioned to benefit from new forms of captives and new growth in the traditional market, argues Tony Dowding.Bermuda owes its position as a leading (re)insurance market largely
to the captive sector. The figures are impressive: Bermuda is the world's
oldest and largest offshore insurance domicile and nearly a third of the
world's captives are domiciled in Bermuda. It has nearly three times the
number of captives of its nearest rival, the Cayman Islands.
Many of Bermuda's attributes, such as the regulatory environment, the
insurance legislation, the tax position and the support services, largely
grew up as a result of the interest in captives.
Simon Scupham, chairman and chief executive of the Mutual Risk Captive
Group in Bermuda, talks of a "continuing metamorphosis" of the captive
industry in Bermuda. He says that with the continuing soft markets
worldwide, traditional types of captive are less prevalent and new
captives, such as special niche vehicles, are being formed.
The new captives include physical presence companies, which enable a
company's back-office management to be carried out by the captive
management company, vehicles for tax efficiency, and, in particular, life
(re)insurance companies. Mr Scupham points out that many captive managers
are now more accurately described as (re)insurance company managers.
One of the attractions of the island as a captive domicile has been its
development as a financial services centre and in particular as a major
international insurance market. A company can set up a captive, buy
reinsurance for it and buy specialist covers such as excess liability,
directors' and officers' cover and the like. In addition, Bermuda is the
leading market for alternative risk financing.
"On the reinsurance side there is a big involvement in captives in the
Bermuda market," says Mr Scupham. "There is definitely one-stop shopping
happening in Bermuda." Finite risk insurance is used by some companies in
conjunction with their captive, but it is not the norm.
Many support services in the form of banks, accountants, lawyers and
investment managers have developed specialist products and services for
captives. For example, Bermuda Commercial Bank and State Street Global
Advisors recently announced an investment programme for captive brokers
and their clients. The programme is being piloted in Bermuda before being
offered elsewhere and includes integrated investment management, letter of
credit services, reporting and client services.
Other developments include proposed legislation on the protection of cell
captives. The island is planning protected cell legislation similar to
that of Guernsey and the Cayman Islands, aimed at all sectors, including
mutual funds, and not just insurance. The legislation is expected by early
Bermuda is also making headway in the growing field of healthcare
In the mid-1970s, Bermuda was unwilling to accept hospital captives,
including cover for their physicians, and the Cayman Islands filled the
gap. As a result, Cayman has long been the main domicile for healthcare
Bermuda now welcomes healthcare captives and recently has seen big
In 1996 it attracted just four, but 11 in 1997 and a further seven in
1998. In total there are about 100 healthcare captives.
The continuing growth of all captives in Bermuda is testimony to the
domicile's resilience in the face of growing competition, soft markets and
attacks on captives by US regulatory and revenue authorities.
Competition has been mainly from Caribbean domiciles, notably Cayman, but
increasingly from onshore domiciles such as Vermont. US states and islands
around the world are also establishing themselves as captive
In the last few years, New York, Maine, Rhode Island and Guam have all
become captive domiciles, along with Lloyd's.
The soft market has undoubtedly affected Bermuda. Nevertheless, there are
plenty of companies from new markets, such as South Africa, eastern Europe
and Latin America entering the market. Soft markets also tend to affect
the amount of business put through a captive, rather than cause its
Regulatory attacks from the US include attempts to bring in anti-fronting
laws, while US revenue authorities continue to attack captives. For
premiums to be tax deductible, a captive must write at least 30% unrelated
business and there have been attempts to increase this to 50%.
However, there is still growth in the traditional captive sector and Mr
Scupham says: "If the market ever hardens, there will undoubtedly be a
revisiting of interest in traditional captives."
CLASS ACT MAKES BERMUDA NUMBER ONE IN THE WORLD'S CAPTIVE MARKET
- The 1999 Tillinghast Directory of Captives, a world listing of captive
insurance companies, contains 4135 entries. Bermuda is estimated to have
- International non-life insurers, which include captives, are divided
into four distinct classes by Bermuda's Registrar of Companies. The first
class includes single parent captives and group captives only writing the
risks of their owners. Class 2 includes multi-owner captives and captives
earning up to 20% of their net premiums from unrelated business. Class 3
includes captives writing more than 20% unrelated business and
rent-a-captives, but includes commercial (re)insurers. Class 4 relates to
catastrophe reinsurers and the like.
- Captives therefore comprise Class 1 and 2 and parts of Class 3. The
latest statistics from the Registrar of Companies reveal that 96 insurance
companies were added to the register during 1998, compared with 93 in
1997. The then Registrar of Companies, Kymn Astwood, described the
continued high level of incorporations as " remarkable", especially at a
time of predominantly soft markets.
- However, in 1998 90 insurers were removed from the register (76 in 1997)
giving a total of 1493 international insurers at the end of 1998, compared
with 1487 at the end of 1997. Growth has clearly slowed, but the continued
growth during a time of soft markets and heavy competition from other
domiciles is a considerable achievement.
- Of the 96 additions in 1998, 18 were Class 1, 20 were Class 2 and 39
were Class 3. New international insurers came from Canada, Holland, Hong
Kong, Japan, Latin America, Luxembourg, South Africa, Switzerland, the UK,
the US and existing Bermudian insurers. The latter two account for the
bulk of the new companies.
- Of the 96 incorporations in 1998, captives totalled 65, or nearly
There were 15 pure captives, nine association captives, nine captives
writing third-party business, nine rent-a-captives and seven healthcare
captives, with the rest agency captives, multi-owner captives and captives
- Of the 1493 international insurers in Bermuda at the end of 1998 about
1200 were captives. At the end of 1998 there were 868 companies in the
first two classes, or 57% of the total, compared with 895 or 60% in
There were 351 Class 3 companies, or 24% of the total, but it is not known
how many were captives.
- However, numbers are not everything, Bermuda's Premier Jennifer Smith
told delegates at ICAP '99, the International Captives Congress in
Bermuda: "Security and creativity are the twin engines for our industry's
growth, not the availability of cheap capacity. Bermuda is not just
seeking growth in the number of companies on our register; the emphasis
remains on attracting the quality players."
- The latest premium and asset figures - for 1997 - show that the Bermuda
market grew by 3% on the year before to be worth $20.4bn, while capital
and surplus rose by 14% to a record high of $48.4bn. Total assets amounted
to $111.8bn in 1997. The net premium income for Class 1 and 2 businesses
fell slightly to $4.8bn, but capital and surplus rose by almost $2bn to
$18bn in 1997.
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