Home > Products > Insurance Tutorial > Home
Home
What is a captive?
A captive is a closely held
insurance company which is usually formed to insure or reinsure the risks of its
owners and affiliates. Some captives are also used to insure unrelated risks.
Captives typically fall into the category of either single parent owned or group
captive where the captive’s beneficial owners generally have similar exposures.
Captives are used to provide either direct insurance coverage or reinsure fronting
companies.
back
to top
The benefits of a captive
- Reduction in the cost
of insurance programs
- Rates are based on individual
loss history rather than industry standards
- Avoidance of commercial
market overheads
- Cash flow advantages
- Premium stabilization
- Retention of underwriting
profits
- Retention of investment
income on unpaid losses
- Increased flexibility
and control over the risk management function
- Customized program design
- Greater management of deductibles
- Ability to self-insure
where commercial insurance is not cost effective or is unavailable
- Greater incentive to optimize
loss control
- Access to reinsurance markets
- Possible tax planning advantages
depending on the parent’s domicile
back
to top
Bermuda
regulation
The
chief officer under Bermuda’s insurance legislation is the Supervisor of
Insurance who leads a regulatory team within the Bermuda Monetary Authority (the
“BMA”). The BMA is an independent body which was established by the
Bermuda Monetary Authority Act 1969. A board of directors is responsible for the
policy of the BMA and the general administration of its affairs and business.
No director may be a politician.
The Insurance Advisory Committee
(the “IAC”), appointed by the Minister of Finance, advises the Supervisor
of Insurance on matters of Bermuda’s insurance law and practice and has
responsibility for vetting all new insurance license applications. The IAC comprises
Bermuda insurance professionals, including accountants, lawyers and underwriters,
as well as regulatory personnel. This consultative process between industry, professional
service providers and regulators makes Bermuda’s regulatory environment
unique amongst worldwide insurance domiciles.
back
to top
Bermuda
legislation
Bermuda’s insurance
industry is legislated by the Insurance Act 1978 and Related Regulations (the
“Insurance Act”). A company must be registered under the Insurance
Act before it can carry on insurance business in Bermuda. The Insurance Act has
a number of key requirements for non-life insurers as follows:
- Every insurer must maintain
a principal office in Bermuda.
- All insurers are required
to appoint a Principal Representative in Bermuda. The Principal Representative
must be approved by the regulators, is a Bermuda resident individual or company
(typically the insurance managers) and represents the insurer in Bermuda.
- Every insurer must prepare
an annual Statutory Financial Return which is filed with the BMA and is not available
for public review.
- All insurers must appoint
an auditor to opine on the insurer’s annual financial statements and Statutory
Financial Return.
- An annual Loss Reserve
Specialist’s Opinion as to the adequacy of loss reserves must be filed by
Class 3 and Class 4 insurers (see Insurance licensing system) and insurers whose
professional liability premiums exceed 30% of gross premiums written or who are
discounting loss reserves to meet solvency margins. The Loss Reserve Specialist
is the insurer’s appointed and regulator approved actuary.
- Insurers must meet the
minimum capital and solvency margins required by their class of license as prescribed
by the Insurance Act (see Insurance licensing system).
- Insurers must meet the
minimum liquidity ratio prescribed by the Insurance Act, that is relevant (i.e.
liquid) assets must exceed 75% of liabilities.
back
to top
Insurance licensing system
There are five classes of
license under the Insurance Act comprising Long-Term insurers and four non-life
classes. Captives typically fall into either Class 1, 2 or 3. The table below
summarizes the different classes of non-life license and the relevant key requirements
of the Insurance Act.
| Class 1
| Class 2
| Class 3
| Class 4
|
|
| Description:
| Single parent captives, risks of parent and affiliates only
| Multi-owner captives and single parent captives writing up
to 20% unrelated business
| Commercial insurers and reinsurers writing more than 20% unrelated
business
| Excess liability and/or property catastrophe insurers
|
| Minimum paid-up capital to obtain license:
| $120,000
| $120,000
| $120,000
| $1,000,000
|
| Minimum solvency marginGreater of:
|
|
|
|
|
| (a) Minimum capital and surplus:
| $120,000
| $250,000
| $1,000,000
| $100,000,000
|
(b) Premium test:
First $6m NPW:
NPW in excess of $6m:
|
20%
10%
|
20%
10%
|
20%
15%
|
50%
50%
|
| (c) Loss reserve test (net reserves):
| 10%
| 10%
| 10%
| 10%
|
| Deadline for filing Statutory Financial Return
| 6 months
| 6 months
| 4 months
| 4 months
|
back
to top
Ten
steps to forming a captive
A Bermuda captive can typically
be incorporated within three to six weeks. The process is as follows:
1. Select professional
service providers
- Insurance managers
- Lawyers
- Auditors
- Banks
2. Reserve preferred
company name
Advise the lawyers of the preferred company name and two alternative names.
3. Complete
pre-incorporation documents
This documentation is completed by the owners and insurance managers and includes
the particulars of the captive’s ownership and administration and a Pre-Incorporation
Form detailing the proposed insurance program. For public companies the latest
annual report and 10K are also required. Personal declarations and financial statements
are required for individuals and private companies.
4. Apply to
Ministry of Finance to be registered as an exempt Bermuda company
The lawyers prepare the Application for Consent to be Registered and the Memorandum
of Association of a Company Limited by Shares, which is basically the company’s
charter. These documents are submitted to the Ministry of Finance, through the
Bermuda Monetary Authority, for consideration to register the captive as an exempt
Bermuda company. An exempt company is not subject to Bermuda’s 60% local
ownership requirements. An advertisement is published in a Bermuda newspaper stating
the intention to incorporate an exempt company and outlining its name and objects.
5. Apply to
Bermuda Monetary Authority to be registered as an insurer
Simultaneously to the application to the Ministry of Finance, the lawyers submit
the pre-incorporation documents, Application for Consent and Memorandum of Association
to the Supervisor of Insurance. This information is vetted by the IAC Admissions
Committee which meets every Friday to review submissions made before 5pm of the
preceding Monday.
6. Approval
of applications
If there are no problems with ownership, capital structure or the proposed insurance
program the Bermuda Monetary Authority forwards consent for the captive to be
registered as an exempt company and the approved Memorandum of Association to
the lawyers. The lawyers submit the approved Memorandum of Association to the
Registrar of Companies who in turn issues a certificate of the Deposit of Memorandum
of Association and Consent granted by the Minister of Finance and the Certificate
of Incorporation.
7. Capital paid
and initial meetings held
The first meeting of the captive’s provisional directors may be held on
the day the approved Memorandum is filed with the Registrar of Companies. The
provisional directors hold office until the main Board is appointed and allot
the minimum share capital of the company and convene the Statutory Meeting of
Shareholders. At the Statutory Meeting of Shareholders the Board of Directors
is elected and the First Directors Meeting is then held. The lawyers apply for
a Certificate of Tax Exemption from the Minister of Finance which guarantees freedom
from Bermuda taxes on income, currently until 2016.
8. Submit Insurance
Applications to Bermuda Monetary Authority
Upon payment of the minimum capital the captive’s Principal Representative
and two directors sign the Insurance Application form which the lawyers submit
to the Supervisor of Insurance.
9. Supervisor
of Insurance issues Certificate of Registration
On receipt of the signed Insurance Application form the Supervisor of Insurance
issues a Certificate of Registration under the Insurance Act.
10. Captive
commences operation
Once the Certificate of Registration is issued the captive may commence writing
insurance business.
back
to top
Useful
links
Regulatory
The Bermuda Monetary Authority: http://www.bma.bm
The Registrar of Companies: http://roc.gov.bm/
The Government of Bermuda: http://www.gov.bm
Bermuda insurance
websites
The Bermuda Insurance Market: http://www.bermuda-insurance.org
Bermuda International Business Association: http://www.biba.org
Bermuda lawyers
Appleby, Spurling & Kempe: http://www.ask.bm
Conyers, Dill & Pearman: http://www.cdp.bm
Mello, Jones & Martin: http://www.mjm.bm
Other
Bermuda Department of Tourism: http://www.bermudatourism.com
|
