Bermuda 2020

BERMUDA 2020

SECURE EFFICIENT INNOVATIVE From the publishers of A time-honoured All provisions Nurturing tech jurisdiction in one advancements Alignment, by .

Butterfield has worked with captives from the beginning, and our expertise has evolved in step with the industry.

Our banking services are fully aligned with the needs of modern captives, providing key cost, tax and risk mitigation advantages, delivered by our highly responsive team.

Let’s have a conversation about how we can put our captive banking experience to work for you.

For more information please contact:

Rick Manuel rick.manuel@butterﬁeldgroup.com (441) 298 4683

Jordache Rawson jordache.rawson@butterﬁeldgroup.com (441) 294 2007

butterﬁeldgroup.com

The Bank of N.T. Butterfield & Son Limited is licensed to conduct banking business by the Bermuda Monetary Authority. Address: 65 Front Street, Hamilton HM 12, Bermuda. Butterfield Bank (Cayman) Limited is licensed to conduct banking business and investment business by the Cayman Islands Monetary Authority. Address: 12 Albert Panton Street, George Town, Grand Cayman, Cayman Islands. FOREWORD

A time-honoured domicile

ontributors to the Captive Review Bermuda report focus on the recent trends Cthey are seeing in their respective lines of business within Bermuda, and how REPORT EDITOR exterior influences are playing their part on the insurance space. Ross Law +44 (0)20 7832 6535 [email protected] For the legacy acquisitions space, the coronavirus pandemic is giving rise to a locus of activity, in contrast to those involved in other areas of the financial services eco- CAPTIVE REVIEW EDITOR system experiencing downturn. Lauren Ingram +44 (0)20 7832 6684 [email protected] All of the contributors within also provide their views on how the pandemic is influ- encing business opportunities at this time. HEAD OF PRODUCTION Claudia Honerjager As a time-honoured domicile, we also hear how Bermuda is well-positioned and forward-looking in terms of fostering innovation in the technology and cryptocur- HEAD OF DESIGN rency space. Jack Dougherty

Overall this report is sure to give our readers a firm understanding about the current SUB-EDITORS Charlotte Sayers state of Bermuda as a first-rate captive insurance domicile. Todd Palmer

PUBLISHING DIRECTOR Ross Law Nick Morgan +44 (0)20 7832 6635 Report editor [email protected]

SENIOR PUBLISHING EXECUTIVE Mansi Khatwani +44 (0)20 7832 6582 [email protected]

BUSINESS DEVELOPMENT MANAGER Richard Freckleton +44 (0)20 7832 6593 [email protected]

DATA/CONTENT SALES [email protected] +44 (0)20 7832 6513

HEAD OF EVENTS Beth Hall +44 (0)20 7832 6576 b [email protected]

CEO Charlie Kerr

Published by Pageant Media, One London Wall, London, EC2Y 5EA

ISSN: 1757-1251 Printed by The Manson Group

3 CAPTIVE REVIEW | BERMUDA REPORT 2020

BERMUDA | CONTENTS

6 BERMUDA: MOVING FROM MATURITY TO INNOVATION AND GROWTH Alison Dyer of Ocorian discusses the maturity of Bermuda’s captive industry, and the positive outlook following the introduction of new insurance and corporate solutions to the jurisdiction

8 THE CURRENT POSITION OF THE RUN-OFF MARKET Paul Corver of R&Q brings us up to date with the run-off market in 2020

11 BERMUDA: VIRTUAL SYMPOSIUM Industry leaders provided insights into innovation and regulation for captives in Bermuda

12 THE FIVE-STAR CAPTIVE DESTINATION Craig Swan of the Bermuda Monetary Authority discusses the recent developments in Bermuda’s insurance ecosystem

15 THE OECD’S NEW TPG Jo Ford, Martin Powell and Jenny Coletta of Ernst & Young outline the impact the OECD Transfer Pricing Guidance on Financial Transactions will have on captive insurers

17 THE PERFECT STORM FOR RUN-OFF SOLUTIONS Eric Haller of Fleming Re addresses how run- off solutions can support recent changes in risk management strategies and the impact of the global coronavirus pandemic

20 SERVICE DIRECTORY

5 CAPTIVE REVIEW | BERMUDA REPORT 2020 BERMUDA | OCORIAN BERMUDA: MOVING FROM MATURITY TO INNOVATION AND GROWTH

Alison Dyer of Ocorian discusses the maturity of Bermuda’s captive industry, and the positive outlook following the introduction of new insurance and corporate solutions to the jurisdiction

ermuda’s captive industry is new licensing regime was also introduced widely recognised as a mature for insurance intermediaries, insurance market with access to excel- Alison Dyer brokers and insurance managers carrying lent insurance talent, top-tier on business in an innovative or experimen- service providers, leading (re) tal manner. Binsurers and a robust, yet commercially is managing director of Ocorian’s Ber- Insurtech is already being widely incor- Alison Dyer minded, insurance regulatory framework. muda office which provides administration and porated into the global (re)insurance mar- As one of the oldest captive domiciles and fiduciary services to the captive insurance and ket; a simple example is that 10 years ago, with many of its captive owners large For- insurance-linked securities markets. If you would like when filing out a home insurance policy support with your captive, please contact Alison at tune 500 companies and multinational Ocorian.com/people/alison-dyer. application, a policyholder may have been enterprises, Bermuda is considered the required to obtain and provide informa- global leader, with more than 700 captives tion such as the distance from the property generating an estimated $40bn in gross test new technologies and offer innovative to the nearest fire hydrant. However, today written premiums annually. products, services, and delivery mecha- an insurer may use tools like Google Earth But is the jurisdiction evolving in order nisms to a limited number of policyholders to obtain such information when providing to remain the leading captive domicile and (or other clients) in a controlled setting with a quote. With the growing trend of technol- attract prospective captive owners – how is appropriate oversight from the BMA. These ogy being applied to traditional insurance, it staying relevant? companies can subsequently register as a the Bermuda captive industry is well posi- normal insurer after the incubation period tioned to attract and develop fresh interest, Embracing innovation ends. There are appropriate safeguards to as insurers seeks to test their innovative The advent of Insurtech in the global (re) protect policyholders and counterparties and experimental ideas in the controlled insurance industry has not gone unnoticed of companies, with time limits, reporting environment provided by the BMA. in Bermuda, and the Bermuda Monetary requirements and disclosure requirements Authority (BMA) has actively sought to built into the ‘regulatory sandbox’. Incorporated cells add to Bermuda’s fold this modernisation into its insurance New insurance classifications and appeal legislation. licences aimed at insurers carrying on Bermuda also introduced the Incorporated Amendments to legislation created a business in an innovative or experimental Segregated Accounts Act 2019 (ISAC Act) in ‘regulatory sandbox’ aimed at giving tech- manner were introduced. The ILT class was 2019, which sits alongside the existing Seg- nology-based insurance startups an envi- created for insurers carrying on long-term regated Accounts Act 2000 (SAC Act), which ronment to incubate their business for a business and the IGB class was created for existing piece of legislation is widely used limited period of time. This allows them to insurers carrying on general business. A by captives in Bermuda. 6 CAPTIVE REVIEW | BERMUDA REPORT 2020 OCORIAN | BERMUDA

The ISAC Act introduced the option of creating segregated cells with legislatively provided separate legal identity. This adds another layer of ring fencing to segregated accounts business that is popular with captives. Many jurisdictions now have segregated cell or protected cell legislation but not all offer incorporated cells as an option. Although not exclusively aimed at the insurance industry, the innovations provided by the ISAC Act add to Bermuda’s captive insurance solution offerings.

Expanding global reach and accessibility Another feature of Bermuda’s mature captive market is its extensive global reach. Bermuda is often referred to as the ‘risk capital of the world’ and the maturity of its captive market inspires confidence. Many of the world’s largest multinational cor- regime being on par with their own. At the insurance capacity to cover risks such as porations and publicly traded companies same time as Solvency II equivalency was travel interruption and worker’s compen- choose to domicile their captives in Ber- granted, Bermuda was approved as a qual- sation. muda, and while most Bermuda captives ified jurisdiction by the National Associa- The relevant Bermuda regulators are have traditionally been North American tion of Insurance Commissioners, further also taking a progressive approach to the and European facing, Bermuda is also a distinguishing Bermuda’s high regard as a cannabis industry and have said that as a popular captive domicile for insurers from global insurance hub. matter of policy, as long as the business is other parts of the world including Africa, Bermuda’s sophisticated regulatory being carried out in a country where can- Asia and Latin America. approach is not limited to its insurance nabis is legalised, Bermuda will allow the Bermuda’s sophisticated technological industry. Notably in early 2020, Bermuda business. infrastructure and interconnectivity ena- was recognised for its AML/ATF regime by bles captives to operate with a global reach. the Financial Action Task Force. It is also a Current market conditions The island is close to opening its new, leader in tax transparency and has a high The Q1 2020 results published by some expanded airport that will add to ease of level of compliance cooperation and infor- major (re)insurers have provided, not travel for the facilitation of physical meet- mation exchange. unexpectedly, significant losses and com- ings as necessitated by the Economic bined ratios of over 100% being reported Substance Act. in many instances. These Q1 2020 results “Bermuda is considered reflect both Covid-19 related and non- A mature market committed to the global leader, Covid-19 losses, and it is expected that regulatory excellence the (re)insurance market will continue The maturity of Bermuda’s captive mar- with more than 700 to harden into the next renewal sea- ket means that it is well placed to pro- sons, continuing the trend of successive vide economic substance for insurers in captives generating an quarters with double digit average price the jurisdiction. Owing to the breadth increases. This environment is likely to and quality of supervision of insurance estimated US$40bn in create new captive formations in Ber- companies in Bermuda, captives have muda and innovative use of new tools by generally found that they were already gross written premiums existing captives. operating with a decent level of sub- annually” Post Covid-19, it will not be surpris- stance that could be refined to meet the ing if the global (re)insurance market requirements. undergoes transformations and Bermu- Bermuda regulators’ proportional, risk- The depth and stability of Bermuda’s da’s captive market may need to adapt to based approach continues to strengthen captive market means it can potentially keep in step. A jurisdiction embracing solu- its captive market. This is highlighted by play a role in creating needed capacity and tions, Bermuda’s mature captive industry the fact that Bermuda remains one of only filling coverage gaps arising from ‘newer’ is not only open for business, but it is also two non-EU jurisdictions that enjoy Sol- perils such as cannabis-related risks, cyber inviting a new wave of modern insurers vency II equivalency, which was granted risks, and even pandemic risks. The cur- armed with innovative ideas, technology by the European Commission in 2015. This rent coronavirus pandemic has highlighted and systems that are enhancing its position demonstrates Bermuda’s commitment to that there may be significant coverage gaps as a practical and efficient captive domicile, enhanced regulation and innovation and related to business interruption risks, and equipped to face the challenging landscape the EU’s views on Bermuda’s insurance that there will likely be a need for greater of the (re)insurance market. 7 CAPTIVE REVIEW | BERMUDA REPORT 2020 BERMUDA | R&Q THE CURRENT POSITION OF THE RUN-OFF MARKET

Paul Corver of R&Q brings us up to date with the run-off market in 2020

Captive Review (CR): How does the current actions which include Covid-19 exposure economic environment impact the legacy are extremely difficult to value. For books market? Paul Corver that include policy year coverage prior to Paul Corver (PC): R&Q’s specific sub-seg- the pandemic, the implications are a mixed ment of the industry focusing on run-off bag. Taking workers’ compensation for exit solutions is better positioned to adapt Paul Corver is the group head of legacy M&A at R&Q. example, claimants who are on permanent to economic cyclicality than our peers in For the last 10 years, he has been actively acquiring disability that contract Covid-19 might find the live underwriting market. This is espe- portfolios of legacy liabilities for R&Q. These have their conditions exacerbated, requiring cially true in cases of economic distress, included acquisitions, LPTs, Part VII and business increased medical costs to the insurer. transfers, novations, mergers and assumptions. A which we are certainly seeing now due to Indirectly, claimants getting treated that particular focus is in the captive and self-insured the financial downturn catalysed by the space where liabilities have been assumed through have been unable to get surgeries or receive outbreak of Covid-19. Distress in the mar- a variety of mechanisms utilising R&Q’s AM Best their regularly scheduled therapy due ket is often an opportunity for the run-off A-(IX) rated company Accredited Surety & Casualty to those medical services being deemed industry because companies will want to in Florida, and its AM Best A- rated company Accred- ‘non-essential’ could also drive up costs. ited Insurance Europe Ltd in Malta. do something proactive to stabilise or nor- On the plus side for insurers, plaintiffs may malise their business, and that could be be more receptive and pragmatic when disposal of legacy liabilities. In many ways, companies self-insuring it comes to offers of settlement given the through captives were ahead of the broader backdrop of recession; but of course, that CR: What recent trends have you observed insurance market in their willingness to may be short-lived and has yet to be borne in the legacy market broadly, and specifi- engage in legacy transactions, both to exit out in any data. Frankly, there is still too cally as it relates to captives? and close programmes in their entirety much about the impact of the pandemic PC: There has been a fundamental shift in and more recently as an active component that is unknown at this point, and answers the perception of insurance and reinsur- embedded in a live programme. As insur- will come when the dust settles. ance companies over the benefits of doing ance is not their primary business, they can something proactive with their run-off afford to be more pragmatic when it comes CR: How has the current market envi- business. I’ve been in the run-off industry to addressing legacy liabilities through ronment affected growth in the run-off for 30 years and for much of the early years solutions provided by run-off players. market? Are there any new overlooked it was deemed to be a dirty, toxic matter. drivers that you see emerging? People steered away from admitting they CR: Speaking specifically to Covid-19, PC: There could be a host of potentially dis- had any, even though run-off is inevitably what are the impacts on your business tressed run-offs coming out of the current a straightforward part of the insurance and what are you seeing from insurers situation, but it’s not necessarily caused cycle. In theory, every policy goes into run- or captives regarding the implications of solely by impacts on the liability side of off when it expires. What we have seen over Covid-19 on claims? the balance sheet; the impact is perhaps more recent years is that exit solutions are PC: The challenges faced by run-off solu- more likely on the asset side of the balance increasingly viewed correctly as a capital tion providers are like those of the live sheet, where maybe the investments by management tool, and the live industry has market; there are so many unknowns in the company have not been as risk averse shed the stigma attached to these deals. sizing the true extent of liability that trans- as originally thought, which can result in a 8 CAPTIVE REVIEW | BERMUDA REPORT 2020 R&Q | BERMUDA significant hit to the capital supporting the business. In addition, reinsurers may be equally impacted, creating greater credit risk for the company. If companies begin to be concerned with the asset side of the balance sheet, then they might start looking at a transfer of some of their liabilities in order to free up capital. Specifically speaking to the captive sector, we are consistently finding that there is a lack of recognition of the true cost of unallocated loss adjustment expenses (ULAE), the gravity of which only truly materialises when the captive enters run- off. We are increasingly finding that once our clients understand the true cost of ULAE, there is little challenge in rationalis- ing an exit solution.

CR: Could you expand on the concept of ULAE as a rationalisation for exit solutions for a captive? PC: ULAE is not traditionally recognised as a liability on the balance sheet or reserve estimates; rather, it is included as the current year estimate, and not the present value of all future outlays. In addition, we have seen that ULAE costs are less variable and even somewhat fixed at a certain point for many captives going into run-off, eventually growing larger as a compo- mediaries and the captive client. High- nent of the reserves. When weighing the “R&Q’s ability to utilise lighting the sophistication and growing present value of the future costs over the knowledge of legacy solutions within the course of the run-off period (in other its fully admitted captive space, increasingly on several words, recognising the true economic and rated US carrier transactions in 2019, the captive became cost of the ULAE liability), it is often the the primary vehicle through which client case that an exit solution creates savings. (Accredited Surety & companies were able to achieve finality Where we can uncover such opportuni- on their legacy liabilities. ties, transactions become ‘no-brainers’ Casualty) continues to For example, one transaction that was as we are able to deliver a win-win sce- closed last year had the client consoli- nario to both parties. appeal to companies dating all their retained workers’ com- pensations and general liabilities across CR: How is R&Q positioned in the envi- with US based multiple legal entities into their captive, ronment to act opportunistically over captives” which created a single counterparty for the next 12 to 18 months? R&Q. In another transaction, a self-in- PC: The latest survey by PWC estimated surance group acted as a multi-pronged $364bn in North American run-off lia- The result has not just been an increase in transit, assuming liability of an unrelated bilities with 79% of surveyed (re)insurers, overall volume and size of transactions we self-insurance group, that simultaneously legacy business acquirers, brokers, service are seeing, but an increase in the number facilitated a loss portfolio transfer with providers and other stakeholders in the of firms approaching R&Q seeking to access R&Q on a quota share basis. Additionally, non-life legacy insurance market saying this growing market through strategic R&Q’s ability to utilise its fully admitted they or their clients were likely to engage partnerships. and rated US carrier (Accredited Surety & in restructuring activity in the next three Within the captive sector, R&Q continues Casualty) continues to appeal to companies years. While this growth opportunity has to offer full finality for captives’ liabilities with US-based captives. attracted new interest from carriers and via novation agreements or outright acqui- R&Q has an active pipeline and is con- capital providers, few carriers outside of sition. A combination of recent enhance- tinually helping captives and other self-in- R&Q have the pre-established infrastruc- ments to R&Q’s due diligence process and sured vehicles restructure their business ture and supported organisational expe- our low execution risk has enabled a more to remove volatility risk and recycle or dis- rience required to execute on these deals. user-friendly service for both the inter- tribute capital. 9 CAPTIVE REVIEW | BERMUDA REPORT 2020

VIRTUAL SYMPOSIUM | BERMUDA BERMUDA: VIRTUAL SYMPOSIUM Industry leaders provided insights into innovation and regulation for captives in Bermuda

he Bermuda Business Devel- at the BDA, said: “We are delighted to be opment Agency (BDA) teamed “We can provide a working with Captive Review to discuss up with Captive Review to host a the latest trends, topics and issues shap- virtual symposium discussing global view as a home ing the future of the captive market. the future of the captive mar- “This will of course include the impact Tket and Bermuda’s role as the world’s to captives from North of Covid-19 but it certainly isn’t the only leading captive domicile. factor at play. As businesses around The virtual symposium gave partic- America, Europe, Asia the world look to put in place the most ipants an insight into the current state and Africa” effective risk management strategies, of the market, the Bermuda captive ensuring they have the relevant infor- solution, regulation and innovation in mation to help make those decisions is captives from cryptocurrency to cannabis client services leader at Marsh Captive critical. Bermuda is best placed to sup- to other emerging risks. Solutions, Mark Allitt, managing director port that. We are home to a broad range The panel was moderated by Lauren at KPMG and Chiara Nannini, director at of industries utilising captives and can Ingram, editor of Captive Review, and Conyers. provide a global view as a home to captives featured industry leading insights from Jasmine DeSilva, business development from North America, Europe, Asia and Michael Parrish, senior vice president and manager for Risk and Insurance Solutions Africa.”

11 CAPTIVE REVIEW | BERMUDA REPORT 2020 BERMUDA | BERMUDA MONETARY AUTHORITY THE FIVE- STAR CAPTIVE DESTINATION

Craig Swan of the Bermuda Monetary Authority discusses the recent developments in Bermuda’s insurance ecosystem

Captive Review (CR): What licensing trends is that they are becoming more data-driven are you currently seeing? in their prices and they’re utilising more Craig Swan (CS): Any discussion of licences Craig Swan in-depth research aggregation modelling. As and trends can’t be divorced from the eco- a result, this is allowing them to tailor solu- system of why captives choose to domicile tions, particularly for large companies. On in Bermuda. Bermuda is a five-star juris- top of this, these coverages include consid- diction because it’s the only jurisdiction in As deputy chief executive officer,Craig Swan is eration of legal exposure as more products the world that has lead positions in rein- responsible for overseeing the Authority’s supervi- are linked and accessible via the internet of sory activities of banks, insurance, trust companies, surance, alternative capital and captives. digital assets and investment businesses. He also things. In the cryptocurrency market, there’s Bermuda is within the top three largest assists in the BMA’s ongoing planning and develop- a market cap of approximately $260bn as of reinsurance centres in the world, and the ment, alongside sharing in the Authority’s executive today. And there’s very little insurance capac- benefit here is that this enables captives to management and participating in key external initi- ity that’s dedicated to it. So, it is a huge oppor- atives with government and industry stakeholders, access reinsurance expertise, reinsurance both domestically and internationally. tunity. Major cryptocurrency exchanges and capacity and markets all within a one-mile service providers are forming captives to city-centre radius. provide the capacity to supplement what is When it comes to alternative capital, see an expansion of captive programmes, already being provided by some of the larger Bermuda is the largest centre in the world, particularly in casualty, marine and pro- global insurance groups. with in excess of 70% of global insur- fessional lines if commercial insurance and Bermuda is a natural fit for captives ance-linked securities (ILS) capacity issued reinsurance rates continue to harden. With providing digital asset and cryptocurrency from the island. When alternative capital respect to the times that we’re living in, we coverage because we at the BMA are very is considered more widely (including ILS, also expect captive opportunities to arise knowledgeable in this area. We were the collateralised reinsurers, sidecars and from coverages that become more restric- first regulator to build a comprehensive dig- more), approximately 60% of alternative tive in reaction to the Covid-19 pandemic. ital asset regulatory framework and have it capital is based in Bermuda. Business interruption coverage might be enacted in law. We’re also prepared for com- The final point of note here is that Ber- an example. mercial writers, and we’ve granted licences muda is also the world’s largest captive to business models that have converged jurisdiction in both the number of captive CR: What trends have you been seeing in insurance and digital assets. companies and, even more significantly, relation to innovation and its VMA scene? As the wave to legalise cannabis gathers the business volume and balance sheet size. CS: Currently, we’re seeing more cyber momentum, particularly in North America, We have total captive premiums in excess lines being written. We’re also seeing we’ve seen captives intending to write this of $40bn and total captive assets of approx- cryptocurrency-related exposures in both business because of capacity shortages. Ber- imately $180bn, which is much larger than crime and cyber. Another noteworthy line muda’s general position is that our country any other captive domicile. is cannabis and cannabis related. is open to coverage of cannabis or canna- As a consistent licensing trend, what At present, cyber-insurance is the fast- bis-related products such as hemp, where we’ve seen is captive formations predom- est-growing coverage among Bermuda cap- those activities are legal at the federal level, inantly coming from large corporations tives. Gross written premiums in this line and the carriers have sufficient controls to located in the US and, more recently, in increased by 46% in 2018 compared to 2017. detect and prevent facilitating any money Canada. Looking forward, we expect to What we’re generally seeing with captives laundering. 12 CAPTIVE REVIEW | BERMUDA REPORT 2020 BERMUDA MONETARY AUTHORITY | BERMUDA

We’re also seeing an increased trend of have an insurance marketplace provider We will also be making greater use of tailored risk management-driven insur- category that we’ve implemented for dig- technology for our consultations to make ance products. The main sectors where ital marketplaces. While our existing cap- them more conducive to the digital world. we’re seeing this are financial services, tive classes are well designed and have the We’re considering piloting a new concept pharmaceutical, manufacturing and tech- flexibility for most innovative products. with respect to exchange of information, nology. Additionally, the captives are also these additional tools widen the scope where firms will be able to provide data making good use of innovative technol- of innovation that our jurisdiction can and documents in a secure environment as ogy. For example, some are using mul- accommodate. we interact with them on a real-time basis. ti-functional systems that encourage early One of the advantages of this will be in reporting capabilities, enabling alternative speed to market, decreasing the applica- compensation ahead of the claim. We’re “I would say that tion processing and response time. The also seeing captives using technologies to Bermuda has a last area I’ll mention is internally at the monitor risk in real-time. In summary, BMA. We’re working on ‘super tech tools’ I would say that Bermuda has a history history of facilitating that incorporate machine learning and of facilitating innovative solutions and artificial intelligence. We plan to transi- supplying capacity where shortages have innovative solutions tion to RegTech and engage in joint ini- existed, and we think that we’re well-posi- tiatives with industry to develop automa- tioned to maintain this in the future. and supplying capacity tion tools to lower the cost of regulatory compliance. CR: What kind of preparations are cur- where shortages In conclusion, we are focused on rently being made in relation to the ensuring that Bermuda remains a strong enhanced digital transformation that have existed” and attractive market, affording appro- will arise from Covid-19? And would you priate policyholder protection. This clear say there are any other positives likely to With regards to the second category, vision was highlighted when the lock- come out of the current situation? which is our own digital transformation, down came into effect. We were able to CS: Post-Covid-19, we expect the pace of we have several pilots that we intend to test seamlessly transition to working on a fully digital transformation to accelerate, and shortly. If successful, we plan to roll them out remote basis, maintaining all of our func- we’re already seeing this with companies across the BMA, including the captive sector. tions—including licensing—at levels that are forced to operate remotely. Recognising We pride ourselves with being a respon- comparable to us being in-office. Covid-19 this, the BMA has adjusted accordingly. We sive regulator and welcoming discussions has had minimal impact on our capability, can categorise our adjustments into two with industry participants. We plan to take and we are still available to licence quality broad categories: one is supporting the this concept even further by providing an prospects who choose Bermuda as their digital transformation of the industry. The additional tool, provisionally called ‘virtual domicile. second is speeding up our own transforma- office hours’, for anyone in the industry to From a supervisory perspective, the tion to allow industry to realise additional automatically schedule one-off or recur- coming years should be an exciting time efficiencies when interacting with us. With ring monthly meetings with our teams for the industry because of innovative work regards to industry transformation, the very quickly and without the need to go being done throughout the BMA, particu- BMA has created an insurance regulatory through the traditional back and forth over larly with the implementation of our IT sandbox and an innovation hub. And we’re the phone or via email. This should lead 2020 plan. It is this that positions us well for also working on innovations to facilitate to greater efficiency in our dialogue with the accelerated digital transformation that sandbox testing across sectors. We also industry. will arise out of these challenging times. 13 CAPTIVE REVIEW | BERMUDA REPORT 2020 ReinsuranceReinsurance Trust Trust Services Services

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Untitled-3Untitled-2 1 14/11/201930/01/2019 15:3413:57 ERNST & YOUNG | BERMUDA THE OECD’S NEW TPG

Jo Ford, Martin Powell and Jenny Coletta of Ernst & Young outline the impact the OECD Transfer Pricing Guidance on Financial Transactions will have on captive insurers

he OECD published its Transfer arrangements. Where the tax authority Pricing Guidance on Financial concludes that the contracts are not gen- Transactions on 11 February 2020. uine insurance contracts, it may conclude This long-awaited final guidance that the insurance is performed by another Jo Ford follows the previous non- con- entity in the group or that there is no insur- Tsensus public discussion draft, which was ance. This is consistent with guidance else- released in 2018. It will be included within where in the TPG. As a consequence, the the OECD Transfer Pricing Guidelines (TPG) guidance concludes that any premiums paid Jo Ford is a director in the Ernst & Young EMEIA and represents the first time that financing by the captive or profits made by it be taxed Financial Services Organisation’s Transfer Pricing team and has specialised in transfer pricing for over transactions have been specifically included elsewhere. 15 years. Ford has extensive experience in design- within the TPG. The guidance sets out what indicators of ing and documenting transfer pricing policies with While the report has overarching com- genuine insurance should be, noting that all a particular area of focus on the captive insurance ments, which apply to all inter-company or substantially all of these factors would be market. Ford can be reached at +44 207 951 3785 or [email protected] financing arrangements, there is a specific expected to be present in an independent section dedicated to captive insurance and it insurer and thus for the captive arrange- is this section that is considered further here. ments to be respected, they should also be present in for the captive insurer. What is ‘captive insurance’ for the purposes of the guidance? Is your captive covered by Diversification and pooling of risk in the Martin Powell these rules? captive insurance The first section of the guidance sets The economic capital position of the entities out that the term ‘captive insurance’ is within the MNE group has improved as a intended to refer to an insurance under- result of diversification and there is there- Martin Powell is an associate partner in the Ernst & taking or entity substantially all of whose fore a real economic impact for the MNE Young EMEIA Financial Services Organisation’s Insur- ance Sector, focused on UK and international tax. He insurance business is to provide insurance group as a whole. spent 10 years as HMRC’s lead for transfer pricing in the policies for risks of entities of the Multi Both the insurer and any re-insurer are insurance industry. Since joining EY in 2017, Powell has National Group (MNE or MNE group) to regulated entities with broadly similar reg- provided tax technical resource on a number of captive which it belongs, and this includes captive ulatory regimes and regulators that require and general insurance tax matters. Powell can reached at +44 207 760 9339 or [email protected] reinsurance through fronting. evidence of risk assumption and appropriate capital levels. What do the rules mean for captive insurers • The insured risk would otherwise be who fall within this definition? insurable outside the MNE group. At a high level, the statement that “the prin- • The captive has the requisite skills, includ- ciples of accurate delineation of the transac- ing investment skills, and experience at its Jenny Coletta tion in Chapter I of the OECD 2017 Transfer disposal, including employees with senior Pricing Guidelines (OECD TPG) apply to cap- underwriting expertise; and tive insurance and reinsurance” means that • The captive has a real possibility of suffer- internationally accepted transfer pricing ing losses. Jenny Coletta is an insurance international tax partner in the Ernst & Young EMEIA Financial Services Organi- principles are applicable to captives in the sation’s Insurance Sector. She has 20 years’ experience same way that they apply to all intra-group It may be challenging to demonstrate some providing international tax advice to insurance and transactions. of the expectations regarding diversification captive insurance companies, leads the global insur- The second section of the guidance cov- and assumption of risks in the absence of ance transfer pricing team and is a member of the EY ers the circumstances where transactions capital modelling exercises, or to definitively Global Captive Network as EMEIA co-lead. She can be reached at +44 20 7951 5993 or [email protected] are not considered to be genuine insurance prove that insured risk would otherwise be

15 CAPTIVE REVIEW | BERMUDA REPORT 2020 BERMUDA | ERNST & YOUNG insurable outside the MNE group, especially internal party and an unrelated party; guidance concludes that risk pooling is only where such risks have been insured within • Benchmarked combined ratio; akin to other centralised group functions the group for a number of years and repre- • Benchmarked return on capital; such as procurement. The example in the sent very specific business risks that may not • Actuarial pricing. guidance suggests this pooling or diversifi- be commonly found in the external insur- cation benefit is not due to the captive itself ance market. The third bullet may apply only The use of a CUP is uncontroversial and a but due to the MNE having diverse geo- to fronting reinsurance arrangements (where benchmarked return on the insurer’s capital graphic risks, and the benefit should then the captive re-insures a third-party insurer) is the most common pricing method by tax be passed on to the affiliate companies. This and could be seen as implying that special reg- authorities. Benchmarking the captive com- seems to entirely misunderstand the role of ulatory regimes for captives might not be evi- bined ratio against independent insurers can captive insurance and the point that a MNE’s dence that the captive is undertaking genuine however be more problematic. Experience group risks can only be diversified or pooled insurance transactions. It should be remem- shows that it is rarely possible to find suffi- in a licensed, regulated captive insurance bered that the indicators are just that, and an ciently comparable data from independent company holding sufficient ring-fenced accurate delineation of the transaction using insurers to perform any meaningful bench- capital. In the absence of a captive insur- the principles in the TPG may still lead to the marking exercise. ance company, each of the affiliate compa- conclusion that the captive is undertaking nies would need to access the third-party genuine insurance transactions. market individually without the benefit Tax authorities pay particular attention “Where the tax of a pooled, diversified book being ceded to the capability of an enterprise to man- authority concludes from a capitalised counterparty. This age and control the risks it assumes; there- would result in a higher cost of capital fore, the ability of the captive’s employees that the contracts are for the third-party insurers which would to manage the captive’s business should impact pricing for the MNE. An accurate be considered. The guidance recognises not genuine insurance delineation of the insurance and rein- that captives can operate with highly out- surance transactions should recognise sourced models as long as the captive’s contracts, it may the captive’s role in unlocking the capital employees perform underwriting and risk benefits for the rest of the group. If that control functions. Specifically, the captive conclude that the includes the assumption and retention of employees should have: insurance is performed insurance risk, the captive should be enti- • The capability to make decisions to take tled to an appropriate reward. on, lay off, or decline a risk-bearing by another entity in the opportunity, together with the actual What should captive owners be doing as performance of that decision-mak- group or that there is a result of this guidance from the OECD? ing function; and the capability to As noted above, this is the first time that make decisions on whether and how no insurance” the OECD has provided specific guidance to respond to the risks associated with in relation to financing transactions and the opportunity, together with the actual The section on return on capital requires therefore captive owners should ensure that performance of that decision-making the captive to have regard to what would be the guidance is reviewed in the context of function. an appropriate level of capital for the risks their individual operating business. Specific • This does not necessarily require signif- assumed by the captive. The guidance sug- points to consider include: icant numbers of staff, but the captive gests that a captive may require less capital • A review of the captive insurer/(re)insurer should be able to demonstrate that the than an independent insurer with a similar fact pattern vs the indicators of genuine employees performing the underwriting, portfolio of risks, which could, if imple- insurance. risk management and control function mented by tax authorities as written lead to • Review the functions performed by the have the requisite qualifications and operational challenges for captives, espe- captive insurer/(re)insurer to ensure experience, and do more than just ‘rub- cially in relation to the levels of capital buffer that they meet the control of risk criteria ber stamp’ decisions made elsewhere. that may be required to reach credit rating ensure that the entity has the capability to equivalence. assume the re/insured risks. What specific points are considered in terms Of more use to captive insurers is the rec- • Review the capital structure of the captive of pricing of transactions? ognition that actuarial methods can be an insurer/(re)insurer to ensure that the cap- Once the initial hurdle has been passed and acceptable way of arriving at an arm’s length ital held is adequate but not excessive for the captive is recognised by the tax author- price. In our experience, tax authorities have the risks assumed. ity as issuing genuine insurance contracts, historically been resistant to actuarial pricing • Consider whether any actuarial pricing the third section of the guidance then has and therefore having obtained approval in should be adjusted for tax purposes. detailed analysis on how the pricing of such the form of guidance, albeit with caveats, is a transactions should be set within multi-na- welcome development. The views expressed are those of the authors tional groups. This can be broadly split into The guidance also suggests a novel and do not necessarily reflect the views of the following methods: approach to pricing insurance transactions Ernst & Young or any other member firm of • Comparable (CUP) agreements either where a captive’s role is to pool risks to access the global organisation of member firms of between two unrelated parties or an third-party reinsurance programmes. The Ernst & Young Global.

16 CAPTIVE REVIEW | BERMUDA REPORT 2020 FLEMING RE | BERMUDA

THE PERFECT STORM FOR RUN-OFF SOLUTIONS Eric Haller of Fleming Re addresses how run-off solutions can support recent changes in risk management strategies and the impact of the global coronavirus pandemic

uring 2019, the run-off market coronavirus pandemic. We anticipate the saw a significant amount of increased demand for run-off solutions to corporate M&A activity-driven continue throughout 2020. transactions. This trend was Eric Haller Motivations for run-off transactions can expected to continue in normal vary based on specific needs. Recent trends Dmarket conditions. At the end of 2019, the indicate a significant driver for restructur- insurance market experienced a harden- ing, in approximately 30% of transactions ing market for certain lines of business and Eric Haller is CEO of Fleming Re, a specialist run- according to the 2019 PwC Global Insur- in response, many risk managers adjusted off reinsurer based in Bermuda. Haller’s reinsurance ance Run-off Survey, continues to be the experience spans more than 20 years and includes their overall strategy by increasing reten- business development, underwriting, treasury, releasing of encumbered capital. The com- tions to capitalise on the changing market. accounting, tax, risk and regulatory compliance bination of this recognised run-off benefit The change to the overall strategy was seen functions. He has held senior roles at various com- with the increased need for liquid capital as beneficial but faced the challenge of panies; Safe Harbor Re, Randall & Quilter Investment to address the current market conditions Holdings, Athene Holding, and XL Capital’s Invest- requiring additional capital. In order to ment Management Group. He began his career with will be the ‘perfect storm’ for demand in facilitate the capital requirement, some Deloitte & Touche, graduating with honours from the run-off sector. risk managers looked to a run-off solution Marquette University. to release encumbered capital. Tumultuous times As we entered 2020, the global economy nesses. These conditions have brought Market disruptions are always challeng- began to experience unprecedented mar- about the most recent factor that is driving ing and most of the time require liquidity ket conditions due to the Covid-19 pan- demand for run-off transactions. We have and capital to successfully survive in try- demic. Many market sectors encountered started to see the initial wave of companies ing times. Covid-19 is no different and it’s significant volatility and were compelled looking for run-off solutions to support likely the world economy will see a signif- to alter operational aspects of their busi- company operations as a result of the icant continued downturn with the inter-

17 CAPTIVE REVIEW | BERMUDA REPORT 2020 BERMUDA | FLEMING RE national monetary fund managing direc- them. We have the ability to quickly assess ing to unlock encumbered capital to pro- tor, Kristalina Georgieva, stating recently: and understand the counterparties’ objec- vide liquidity which has become a critical “We anticipate the worst economic fallout tives, clearly define their needs and then consideration responding to current mar- since the Great Depression.” During times structure unique solutions that are better ket volatility. of market turmoil, we expect companies aligned to accomplish specific goals. This Fleming Re itself has not experienced a will look at various potential sources of customised approach will facilitate cli- significant impact from illiquidity, oper- capital to meet their needs. Traditional ents being able to respond quickly to the ational disruptions or financial loss. As capital sources can be both challenging specific impacts of this pandemic on their such, we are in an opportunistic position and expensive during market disruptions. business. to assist and support other companies to An often-overlooked source of capital One important aspect of a successful successfully navigate the market disrup- is the encumbered assets supporting an run-off solution that needs to be con- tions caused by Covid-19. We benefit from entity’s insurance liabilities; and one of sidered is the structure and/or type of a large network of clients and industry the primary goals of run-off solutions is to transaction. The most important factor service providers who know our company release that capital. is that the selected structure is aligned and the value we provide. While it is always Global economic shocks, such as we are to the specific goals outlined at the onset more productive to meet face-to-face, experiencing, often lead companies to of the transaction. The more common new and existing online tools and video pivot their focus on their core businesses goals are access to encumbered capital, conferencing are rapidly adapting to a vir- and examine the financial benefits of con- removing the ‘tail’ of liabilities and reduc- tual office environment and will certainly solidation, restructuring or exiting certain tion of operational expenses. There are assist in maintaining relationships. In ancillary operations or lines of business numerous transaction structures that can today’s circumstances, we are using new that are no longer appealing or viable. This be employed, but this will be partially and creative ways to stay in contact. may involve re-evaluating the strategy related to insurance liabilities of related Impact on Bermuda parties with affected operations. The “We anticipate the While Bermuda may be relatively phys- insurance industry and transaction ically isolated, we are facing the same counterparties have recognised that increased demand for restrictions as many countries around run-off can be used to enhance their the world. Undoubtedly, this pandemic risk management strategies, liquidity run-off solutions to is likely to change how businesses oper- and regulatory capital ratios. Examples continue throughout ate for the foreseeable future and tech- of this could include insurance compa- nology will be a crucial tool in engaging nies looking to use run-off transactions 2020” customers. Like much of the world, the as a less-costly form of financing com- island was put on lockdown and ‘stay pared to the equity and debt markets or in place’ protocols were implemented a corporate operating company looking to dependent on the current entity structure in early April. However, for the financial release capital from its captive in order to of the client and jurisdiction. Some com- services industry, including the insurance provide liquidity and support their opera- mon types of structures are: acquisition; market, it is ‘business as normal’ in Ber- tions in these uncertain times. novation; loss portfolio transfer (LPT); muda for the most part. It is likely that many organisations will assumption; adverse development cover Bermuda has a long history of weather- face challenges continuing business opera- and deductible reimbursement policy. It ing storms and this situation is no differ- tions throughout and following the Covid- is important to understand that no single ent. The Bermuda Government is working 19 pandemic. Despite the many issues sur- structure is perfect for every situation. The with the international business sector to rounding this unprecedented event, it will most critical aspect is that there is open ensure registered companies have busi- put a spotlight on risk management and communication between the run-off pro- ness continuity plans in place and are building resilient business strategies to vider and the client to establish goals and monitoring the impact to all regulated enable companies to survive global mar- discuss the best structure to achieve those industries. As Bermuda is a large insur- ket disruptions. While we are distressed goals. No matter how complex the entity ance hub, our infrastructure has always that the world is facing such catastrophic structure, Fleming Re will find a solution been of a high quality and we have been upheaval, there are areas in which Flem- that is appropriate for the client and with able to successfully manage the transi- ing Re can help our clients and perhaps our expertise, will limit any execution risk. tion to working from home. While this lessen their burden, so they can focus on has required some changes and business their core businesses going forward which Mitigating Covid-19 travel has been halted for the foreseeable in turn benefits the communities in which Our team has industry knowledge across future, the people and businesses of Ber- they operate. various jurisdictions and lines of business muda are managing the trying times with coupled with significant experience in great efficiency. Investments in IT infra- Identifying the right solution structuring customised solutions tailored structure and business continuity plan- First and foremost, at Fleming Re, we work to the legacy and corporate M&A sectors. ning by the international business sector with our clients to identify their motiva- We are assisting client organisations in have paid off. The future is certainly going tions and specific goals to determine if mitigating the impact of Covid-19 on their to be challenging, but also full of oppor- a run-off transaction is appropriate for businesses, especially when they are seek- tunity.

18 CAPTIVE REVIEW | BERMUDA REPORT 2020 UNI_CB-210400-02_Captive Award Badge.pdf 1 9/10/19 11:53 AM

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