Bermuda’s (re)insurance sector has experienced several notable developments over the past year. Among these are the advent of Solvency II and its impact on the reinsurance sector, the status of the captive industry, the continuing growth of the alternative reinsurance market, and insurance-linked securities (ILS). In addition, hedge fund backed reinsurers and finally, the potential rise of the life and longevity reinsurance market – a space with potential to show the most growth over the next year – have been of particular interest.
After over six hard years of effort by the commercial and regulatory sectors on the Island, Bermuda was awarded full Solvency II equivalence by the European Commission in early December 2015, meaning the Island is now subject to a full Solvency II regulatory regime – second only to Switzerland in receiving such an endorsement.
For the large, commercial reinsurers with a presence and operations on the Island, our jurisdiction is now treated as equivalent by European regulators and therefore competes on a level playing field with any EU state. Obtaining equivalency was important for the players within Bermuda’s commercial reinsurance sector, as otherwise they would have had to consider a number of implications such as recapitalising their vehicles, restructuring, or at worst, re-domiciling to an EU-compliant jurisdiction.
All of the work to achieve equivalency has, of course, resulted in tremendous changes to the insurance legislation and regulation that applies to the Island’s commercial reinsurers. These include matters such as the creation of additional classes of commercial insurers and reinsurers, the introduction of an Insurance Code of Conduct and a requirement to file additional and more detailed solvency and capital returns. Other measures such as new Bermuda Monetary Authority (BMA) disciplinary controls, eligible capital rules, head office requirements, notification and approval requirements for shareholder controllers, etc. have also been introduced.
As a result of implementing many of these measures, through a Memorandum of Understanding signed between the respective authorities, Bermuda’s commercial reinsurance regime also received “qualified jurisdiction” status from the National Association of Insurance Commissioners (NAIC) effective 1 January 2015. This qualified jurisdiction status allows Bermuda’s commercial reinsurers to operate with reduced collateral requirements relating to US claims, so long as their particular claims have been evaluated and certified.
In short, the new regulatory requirements gradually introduced by the BMA in conjunction with industry cooperation are crucial for our commercial sector to compete on a worldwide basis. They also bear testament to the Island’s efforts to secure a supportive environment that has kept up with regulatory requirements generally and in particular within the US and EU. As such, the Island remains a professional and business-friendly jurisdiction for both commercial reinsurers already established here and those also looking to set up operations.
The “Carved Out Captives”
The BMA has also been remarkably successful at “carving out” captives from the new regulatory requirements. This has been achieved by effectively dividing the insurance sector into clearly defined classes of insurance: commercial and captives. The distinction has freed the captive sector from a gamut of regulatory requirements that should not be applicable to them from neither a practical nor from a regulatory perspective.
As an example, Bermuda introduced an Insurance Code of Conduct in the early stages of Solvency II implementation, applicable to all insurers, including captives. However, the enforcement and application of the Code has been done on the basis of the BMA’s “proportionality principle”, meaning that its compliance is subject to the nature, scale and complexity of the risk undertaken by the particular insurer. Because most Bermuda captives have an existing board and insurance management structure in place, that compliance was and remains a non-issue.
As a result, Bermuda remains one of the premier locations to do captive business – whether offshore or onshore. Bermuda benefits from a long-standing base of talented insurance managers, auditors, actuaries and lawyers. These service providers enjoy excellent relationships with the BMA - itself a friendly, responsive, and highly credible insurance regulator.
Solvency II equivalence ensures the longevity of the thriving commercial reinsurance sector on the Island, alongside that of its well-established service providers. It is clear that Bermuda will remain a leading choice for captive insurers looking to set-up new vehicles.
Alternative Reinsurance Capital Growth
In 2015, the two most significant deals in the alternative reinsurance capital space entailed the establishment of ABR Re and Fidelis, two new Bermuda Class 4 reinsurers. Both were hybrid underwriting/investing reinsurance vehicles, but each implemented different strategies.
ABR Re was specifically formed to underwrite reinsurance treaties placed uniquely by ACE Limited within the reinsurance market while having its assets tied to an investment portfolio managed by a single asset manager, BlackRock ABR Re, as more or less a captive reinsurer of ACE, may well help ACE to use its reinsurance at a lower cost and more efficiently. But when used as a model by others going forward it could cause concern for other third party reinsurers, such as those who do not already sit on the particular reinsurer’s panel for reinsurance purposes.
Fidelis was a vehicle set-up by former Lancashire Re executives, Richard Brindle and Neil McConachie, but unusually backed by more than a single asset manager (in this case, largely three asset managers: Pine Brook, Crestview and Oaktree). Fidelis – as a model – may possibly have knock-on effects on the alternative reinsurance market generally. It could lead the way to an approach where smaller asset managers have no choice but to team up with larger ones in order to enter this market.
The anticipating evolution of these fund managed/backed reinsurance models makes for an interesting industry segment to observe. Bermuda continues to remain a dominant jurisdiction for the alternative insurance market in general, and shows growth in the formation of special purpose insurers (SPIs), particularly in the cat bond arena. Increasingly, it appears that the capital markets and investors have become more educated and comfortable with reinsurance as a potential investment, and so long as interest rates remain low. Further evidence of this came in the summer of 2015 as we saw the formation and issuance of variable rate notes by Panda Re Ltd, an insurance SPI formed by the Chinese state-owned property and catastrophe reinsurer, China Re. This was the first ever cat bond covering Chinese perils, a P&C market which, while underdeveloped, shows potential for expansion – and, again, the potential for use of Bermuda alternative insurance vehicles.
The Long-Term Life & Longevity Sector
The long-term life sector is an oft-overlooked segment of Bermuda’s insurance industry, but comprises approximately a third of the total Bermuda market. As we have in place both a developed commercial reinsurance industry, and an alternative insurance regime, the implementation of Solvency II status appears to have come at precisely the right time for Bermuda.
Why is this? Commercial life reinsurers prefer Bermuda and have been here for a while, either as subsidiaries of large groups such as ACE, XL, Arch and Partner Re, or as dedicated life and annuity reinsurers, set up by investment firms focusing on a need to support the (largely US) annuity insurance market. Bermuda provides these reinsurers with a sensible, well respected centre for life reinsurance, with an effective regulatory environment and regulator – and which is now deemed a “qualified jurisdiction” in both the US and EU.
In the life insurance space, there are other features which make Bermuda attractive. The Island has its own segregated cell legislation that can be utilised, particularly for very large individual investment linked insurance products, to ensure that assets held by a cell established for a policy are not legally available to meet any other liabilities of either the insurance company or any of its other cells (ie, in the event of an insolvency).
We are also a common law jurisdiction, meaning that decisions of UK Courts, while not automatically binding on a Bermuda court, are highly persuasive. The UK Privy Council is Bermuda’s highest court, which is attractive from a policyholder protection standpoint for life companies looking to form here.
Bermuda is also well placed to take advantage of a growing sector: longevity risk. In the UK, in particular, there is a huge demand to reduce longevity risk brought on by pension schemes having exposure to retired employees living longer than expected. Having achieved Solvency II status, Bermuda’s existing commercial long-term reinsurance market should be well placed to take advantage of the potential growth of European (re)insurers wanting to hedge their exposures to this longevity risk. There is much potential for new entrants into this market - and the form these will take is of great interest.
With the increasing sophistication of the alternative capital reinsurance space and the headway Bermuda has made in this area, we anticipate 2016 to bring about a trend of new life players potentially entering the Bermuda life reinsurance market in an alternative capital or ILS form (perhaps even using segregated cell vehicles). Those players would be backed by investment funds or asset managers who are either new entrants or existing players seeking to diversify their portfolio of reinsurance risk through acquiring existing life companies (meaning the M&A activity we have seen of late will continue) or expanding their existing licenses. Bermuda’s flexibility as an insurance market, both as a commercial market and an alternative market, ensures Bermuda is well primed to take advantage of that growth.
With Solvency II equivalency now secured, and after many years of collaboration between the BMA and the reinsurance industry, Bermuda is and remains a major platform for large commercial reinsurers and alternative insurance players who appreciate the flexibility which Bermuda’s platform provides and, of course, the regulatory ease of the captive industry.
The space to watch, however, will be the life reinsurance industry. It will be interesting to see whether, how, and in what form this sector evolves as it takes advantage of Bermuda’s new competitive advantage in the marketplace.
Chris Garrod is a Director in the Corporate department of Conyers Dill & Pearman’s Bermuda office. He joined Conyers in 1997 and is a member of the Firm's insurance practice. Chris specialises in advising on reinsurance and ILS structures, including large commercial insurers, life reinsurers, special purpose insurers, cat bonds, sidecars and segregated account vehicles. In addition to his insurance practice, he also advises on all aspects of Bermuda corporate law, including mergers and acquisitions, takeovers, reorganisations and re-domestications.
Conyers Dill & Pearman
Bermuda, British Virgin Islands and Cayman Islands.