1. Basis of Insurance and Reinsurance Law
1.1 Sources of Insurance and Reinsurance Law
The principal legislation governing companies in Bermuda is the Companies Act 1981, as amended (Companies Act), under which the majority of companies in Bermuda are incorporated by registration.
In addition to the Companies Act, (re)insurance companies and (re)insurance intermediaries in Bermuda are also governed by the provisions of the Insurance Act 1978 and related regulations, rules and guidance notes, each as amended from time to time (Insurance Act), which applies to any person carrying on insurance business in or from within Bermuda. “Insurance business” is the business of effecting and carrying out contracts to protect persons against loss or liability to loss in respect of risks to which they may be exposed or pay a sum of money or render money’s worth on the occurrence of a loss event, and includes reinsurance business.
Insurers in Bermuda should also be aware of the provisions of the Life Insurance Act 1978, as amended (Life Act), the Segregated Accounts Companies Act 2000, as amended (SAC Act), and the Non-Resident Insurance Undertakings Act 1967, as applicable.
The Companies Act
Bermuda companies fall into two principal categories – companies incorporated by Bermudians to trade primarily in Bermuda, and companies incorporated by non-Bermudians for the purpose of conducting business from Bermuda outside Bermuda.
We will focus on the latter form of company. Companies falling into this category are known as “exempted companies” as they are exempted from those provisions of Bermuda law stipulating that at least 60% of the equity in the company must be beneficially owned by Bermudians.
In general terms, the Companies Act restricts an exempted company from carrying on business in Bermuda, except to the extent that it is so authorised by its constitutional documents and has been granted a licence by the Minister of Finance (Minister), who will determine whether or not the granting of such a licence is in the best interest of Bermuda. Having said that, there are certain activities that are expressly excluded from the requirement for a licence. Such activities include:
- doing business with other exempted undertakings (ie exempted companies, permit companies, exempted partnerships and exempted unit trust schemes) in furtherance of the business of the exempted company that is being conducted outside Bermuda;
- carrying on the business of reinsuring risks undertaken by any company incorporated in Bermuda and permitted to engage in insurance or reinsurance business;
- dealing in securities of exempted undertakings, local companies or partnerships; or
- carrying on business as a manager or agent for, or consultant or adviser to, any exempted company or permit company that is affiliated (whether or not incorporated in Bermuda) with the exempted company or an exempted partnership in which the exempted company is a partner.
In Bermuda, there are no taxes on profits, income or dividends, nor is there any capital gains tax, estate duty or death duty. Profits can be accumulated and it is not obligatory to pay dividends.
The Bermuda Government has enacted legislation under which the Minister is authorised to give an assurance to an exempted company, permit company, exempted partnership or exempted unit trust scheme that “in the event of there being enacted in these Islands any legislation imposing tax computed on profits or income or computed on any capital asset, gain or appreciation, then the imposition of any such tax shall not be applicable to such entities or any of their operations”. In addition, there may be included an assurance that any such tax “and any tax in the nature of estate duty or inheritance tax, shall not be applicable to the shares, debentures or other obligations” of such entities. This assurance may be for a period ending not later than 31 March 2035; the assurance is applied for as a matter of routine and is invariably granted for the full period.
All exempted companies are, however, required to pay an annual government fee which is based on a company’s assessable capital, the product of its authorised share capital and share premium, if any. The first payment of such fee is made immediately upon incorporation and subsequent payments are made in January of each year.
Pursuant to the Payroll Tax Act 1995, as amended, and the Payroll Tax Rates Act 1995, as amended (together, the Bermuda Payroll Tax Act), payroll tax consists of two separate portions, being an amount paid by the employer (Employer Portion) and an amount paid by the employee (Employee Portion), the sum of which is the total payroll tax payable (Total Payroll Tax). Currently, the Employer Portion operates starting at 1.75% of annual payroll under BMD200,000, increasing to 7% where annual payroll is BMD200,000 up to and including BMD500,000, increasing to 9% where annual payroll is more than BMD500,000 up to and including BMD1,000,000 and further increasing to 10.25% where annual payroll is more than BMD1,000,000.
The Employee Portion is calculated using a marginal tax rate structure starting at 4% where annual gross earnings of the exempted company are less than or equal to BMD48,000, increasing to 6.5% where annual gross earnings are BMD48,001 up to and including BMD96,000, increasing to 7.75% where annual gross earnings are BMD96,001 up to and including BMD235,000 and further increasing to 8.75% where annual gross earnings are BMD235,001 and above. The responsibility to pay the Total Payroll Tax to the Office of the Tax Commissioner rests with the employer; however, employers have the option to deduct the Employee Portion from employees’ remuneration.
Remuneration over BMD900,000 per annum is disregarded for the purposes of both the Employer Portion and the Employee Portion.
Directors and Officers
The board of directors, which manages the business of a company, is elected at the statutory meeting of the shareholders. The term of office of a director generally runs from one annual general meeting to the next; however, the by-laws may provide for longer terms and retirement by rotation, and or other bespoke aspects of the Board’s tenure or management.
Any individual may be appointed an alternate director by, or in accordance with, a resolution of the shareholders, or by a director in such manner as may be provided in the by-laws. An alternate director has all the rights and powers of a director except that he cannot attend or vote at a meeting unless the director by whom he has been appointed an alternate is absent. The shareholders may, at any general meeting, increase the maximum number of directors and, if provided for in the by-laws, fill, or authorise the directors to fill, any vacancies created. Should a vacancy occur on the board, the remaining directors may fill such a vacancy.
Subject to contrary provisions in the company’s by-laws, the shareholders of a company may, at a special general meeting convened for that purpose, remove a director and appoint another person in their place.
Board (and shareholder) meetings may be held by telephone. The board may also act by unanimous written resolution.
The duties of a company’s officers (which term includes directors) have been codified in the Companies Act and are broadly reflective of the position at common law. Every officer, in exercising their powers and discharging their duties, must act honestly and in good faith with a view to the best interests of the company; and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
A company is permitted, either by contract or in its by-laws, to indemnify its officers against any liability attaching to them by reason of their office, other than in respect of fraud or dishonesty. A company may purchase and maintain insurance for the benefit of its officers.
The by-laws of a company govern its internal organisation, management and administration. The by-laws are a private document, subject neither to governmental review nor to public inspection.
The adoption and amendment of by-laws is a two-stage process – directors may adopt and amend by-laws, with the by-laws then being submitted to a general meeting of the company and are operative only to the extent that they are approved at such meeting.
The by-laws must provide for, amongst other things, the holding of an annual general meeting in each year; an audit of the accounts of the company once in every year; the transfer and transmission of shares; and the quorum for general meetings. In addition, the by-laws may regulate such matters as the allotment of shares, the payment for shares, the declaration and payment of dividends, the duties and responsibilities of the company’s officers, the calling of and voting at meetings, and the conduct of the affairs of the company generally.
A company may not declare or pay a dividend if the directors have reasonable grounds for believing that the company is, or will after the payment of the dividend, be unable to pay its liabilities as they fall due, or that the realisable value of the company’s assets will fall below its liabilities. In addition, insurers must ensure that the declaration and payment of a dividend does not cause them to fail to meet their solvency or liquidity margins pursuant to the Insurance Act. The Companies Act enables distributions to be made out of contributed surplus (in broad terms, donated cash or other assets). There is no statutory obligation to pay dividends.
Furthermore, under the Insurance Act, commercial (re)insurers cannot in any financial year pay dividends that would exceed 25% of its total statutory capital and surplus, as shown on its statutory balance sheet in relation to the previous financial year, unless at least seven days before payment of those dividends it files with the BMA an affidavit signed by at least two directors; and by the insurer’s principal representative in Bermuda, which states that in the opinion of those signing, declaration of those dividends has not caused the insurer to fail to meet its relevant margins.
Generally, an insurer carrying on long-term business and general business (as such terms are defined below), is also restricted from declaring or paying a dividend unless the value of its assets in its long-term business fund exceeds the extent of the liabilities of the insurer’s long-term business, as certified by the insurer’s approved actuary.
A company registered as a segregated accounts company under the SAC Act may not declare or pay a dividend or distribution in respect of shares or other account holdings linked to a segregated account if there are reasonable grounds for believing that the segregated account is not, or would after the payment not be, solvent, or the realisable value of the assets of the segregated account would thereby be less than the aggregate of its liabilities, its issued share capital and share premium accounts
A company that writes insurance (other than special purpose insurers) is required to have a minimum authorised and issued share capital of at least BMD120,000 (this amount will vary depending on the company’s insurance classification), which must be fully paid in cash prior to the company’s registration as an insurer.
On an insolvent winding-up, a shareholder of an exempted company (being a limited liability company) is liable for up to, but not exceeding, the amount then remaining unpaid on their shares. It is also possible to incorporate companies whose shareholders’ liability is unlimited.
A company may issue preference shares that, if authorised by its by-laws, are redeemable at the option of the company and that, if authorised by its memorandum, are redeemable at the option of the holder. Further, the Companies Act confers on a company, if so authorised by its memorandum or by-laws, the power to purchase its own shares and hold them in treasury.
Under the Insurance Act, commercial or innovative (re)insurers cannot reduce total statutory capital by 15% or more without the approval of the Bermuda Monetary Authority (BMA). Application for approval must include an affidavit signed by at least two directors; and by the insurer’s principal representative in Bermuda, which states that in the opinion of those signing, the proposed reduction of capital will not cause the insurer to fail to meet its relevant margins and such other information as the BMA may require.
The Insurance Act
As mentioned above, the Insurance Act applies to any person carrying on insurance business in or from within Bermuda, and provides for the registration of all insurers and insurance managers, insurance marketplaces, brokers, agents and salesmen.
The BMA is responsible for the licensing, supervision and regulation of financial institutions in Bermuda, including those conducting insurance, deposit taking, investment and trust business on the island. The BMA may make regulations that, among other things, divide insurance business into classes for the purposes of any provision of the Insurance Act. The Insurance Act identifies domestic business and distinguishes between general business, long-term business and special purpose insurers.
The Life Insurance Act
The Life Act applies to contracts of life insurance. The Life Act prescribes the contents of policies, group policies and certificates. The Life Act defines what is and is not an insurable interest, and there are specific provisions dealing with the payment of premiums, default in paying premiums, the duty to disclose, incontestability, pre-existing conditions, the non-disclosure by the insurer, the effect of suicide, reinstatement, the designation of beneficiaries, the right to sue, the assignment of policies, and the general powers of the court in relation to disputes between an insurer and one of its insureds.
The Segregated Accounts Companies Act
The SAC Act establishes a registration regime whereby a Bermudian company may register as a segregated accounts company, thereby establishing, operating and maintaining a company with segregated accounts. A segregated account (in some jurisdictions described as a “protected cell” or “segregated portfolio”) is an account containing assets and liabilities that are legally separated from the assets and liabilities of the company’s ordinary account, called its “general account” and also separate from such company’s other segregated accounts (if any). Companies having segregated accounts are known as segregated accounts companies and will be referred to in this chapter as a SAC.
The SAC Act affirms, however, that a segregated account is not a legal person distinct from the SAC itself. The effect of this statutory division is to protect the assets of one account from the liabilities of other accounts. As a result, the accounts will be self-dependent, such that only the assets of a particular account may be applied to the liabilities of that account. The statutory divisions between accounts do not create separate bodies corporate, but rather achieve within a single company what could otherwise be achieved, for example, by incorporating subsidiaries or by using complex contractual and trust structures. The substance of the relationship between an SAC and its assets is in the nature of a trust, in that the SAC Act describes a segregated account as being a separate fund from within the company’s own assets. Such a separate fund is created by way of a mandated agreement between a company and its client. Despite the trusts nature of a segregated account, the SAC Act expressly excludes fiduciary responsibilities and the general law of trusts from applying to the establishment and management of a segregated account.
The SAC Act may be used for a variety of insurance purposes. Among them include rent-a-captives, life and annuity companies, transformer vehicles, as well as financial guarantee, securitisation and derivatives structures, and special purpose vehicles. A company licensed under the Insurance Act may freely register under the SAC Act without specific consent from the Minister. Once the company is registered under the SAC Act it may establish segregated accounts.
Bermuda’s legislature has recently tabled legislation that will bring about incorporated segregated accounts which permit and codify the creation of segregated accounts each having a separate legal personality. This is expected to be enacted in the near future.
In relation to insurers, a segregated accounts insurance company may be used as a variation of a “rent-a-captive”. A rent-a-captive is a risk financing solution in which the sponsor (such as a captive manager) establishes and licenses a captive insurance company and “rents” the core capital, licence and corporate capacity of the vehicle to programme participants, thus providing participants with the many benefits of captive risk financing without the attendant administrative and capital costs associated with a pure captive. Rent-a-captive programmes have lowered the cost of establishing one’s own captive, opening this solution to smaller corporations and other entities for which ownership of a captive would otherwise be too expensive. In a rent-a-captive that does not offer legal segregation of accounts, participants agree among themselves to keep the gains and losses of each participant separate from the others on a programme by programme basis.
These internal agreements would not generally be effective against third parties such as creditors of the rent-a-captive in the event of liquidation. In a segregated account rent-a-captive, each participant’s programme is legally segregated from the other, thus making the separation between participants in the rent-a-captive unassailable in the event of a liquidation or receivership. This is the principal advantage of the segregated accounts rent-a-captive, offering “fire walls” between programme participants that should withstand the claims of third party creditors of another participant. Participants need not be concerned that the underwriting losses of an imprudent participant may bring the whole facility down.
Life and Annuity Companies
Legal segregation of accounts also has application in the insurance industry outside of the group captive context. Insurers underwriting long-term risks, such as life, disability, pension plan or annuity programmes, can take advantage of the legal segregation of reserves among different programmes and products, or on an insured by insured basis.
So-called “transformer” companies are those engaged in the transformation of insurance risk into capital markets products and vice-versa. In cases where a single company enters into multiple arrangements of this kind, it will often be desirable to do this through segregated accounts.
Governing Instruments (Account Owners)
The rights, interests and obligations of account owners in a segregated account must be evidenced in a governing instrument. The SAC Act sets out a few requirements that are thought to be essential in relation to governing instruments; namely, that the governing instrument is governed by the laws of Bermuda and the parties submit to the jurisdiction of the courts of Bermuda. The legislation also outlines a number of provisions that may (but need not) be included. Most of the permissive requirements in relation to governing instruments are self-explanatory and provide for general management powers of a standard and routine character.
A person becomes an account owner by satisfying the conditions, if any, set out in the governing instrument for becoming an account owner, ie an account owner takes such interest in a segregated account as may be provided for in the governing instrument. If the governing instrument does not indicate any interest, and there is no other compelling evidence indicating an interest, then the person has no interest in the segregated account. Governing instruments would normally provide that, if no other provision applies, an account owner’s interest would include being entitled to receive any dividends declared in respect of the class of interest held by him and to receive a pro rata share of the net assets of the account upon winding down the affairs of the account.
The legislation includes a default provision that applies if the governing instrument does not deal with management of the segregated account. The default position is that the SAC itself manages the affairs of a segregated account and may appoint managers, employees and others appointed to manage the segregated account and enter into financial arrangements for payment for services, such as the charging of fees and disbursements.
2. Regulation of Insurance and Reinsurance
2.1 Regulatory Bodies and Legislative Guidance
The BMA is responsible for the licensing, supervision and regulation of financial institutions in Bermuda, including those conducting insurance, deposit taking, investment and trust business in Bermuda.
The BMA, an independent body that has been in existence since 1969, took over responsibility for the supervision of the insurance industry in 2001, replacing supervision by the Ministry of Finance. The BMA has evolved as a supervisor, regulator and inspector of financial institutions in accordance with the evolution of international standards. Over the last few years, in particular, the BMA’s powers have been bolstered by legislative amendments to the Insurance Act 1978 (the Insurance Act), which contains the legal framework for insurance regulation in Bermuda.
The BMA is the primary regulator of insurance companies in Bermuda. It is responsible for the supervision, regulation and inspection of Bermuda’s insurance companies and for the licensing of all insurance companies, insurtech companies, insurance marketplaces, brokers, agents and managers. The BMA maintains a distinct insurance division comprised of a supervisor of insurance, technical analysts, actuarial and other staff focusing solely on the regulation of Bermuda’s insurers. The insurance division coordinates the weekly meetings of the Insurance Licensing Advisory Committee, which considers, amongst other things, applications for the establishment of new insurers under the Insurance Act.
The BMA also has a legal authorisation and compliance division, which vets the ownership of all entities incorporating or forming in Bermuda and liaises with the various divisions within the BMA to ensure compliance. The BMA carefully scrutinises the ownership of these entities, requiring information on the direct, intermediate and ultimate owners. The BMA must be satisfied that the persons who wish to own/control such entities are persons of integrity and good standing.
In applying a risk-based regulatory approach, the BMA employs a framework that assesses the nature, scale and complexity of entities seeking to conduct business in Bermuda, their related risk and the level of sophistication of the clients involved, and then supervises them accordingly. For commercial (re)insurers, the BMA established a risk-based capital model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalisation (termed the Bermuda Solvency Capital Requirement (BSCR) or an in-house (re)insurer solvency capital model approved by the BMA). The BSCR model is a risk-based capital model that provides a method for determining an insurer’s capital requirements (statutory capital and surplus) by taking into account the risk characteristics of different aspects of the insurer’s business. The BSCR formulae establish, on a consolidated basis, capital requirements for ten categories of risk:
- fixed income investment risk;
- equity investment risk;
- interest rate/liquidity risk;
- currency risk;
- concentration risk;
- premium risk;
- reserve risk;
- credit risk;
- catastrophe risk; and
- operational risk.
For each category, the capital requirement is determined by applying factors to asset, premium, reserve, creditor, probable maximum loss and operation items, with higher factors applied to items with greater underlying risk and lower factors for less risky items.
The BMA introduced prudential standards in relation to all commercial (re)insurers’ enhanced capital requirement (ECR). The ECR is equal to the higher capital and surplus requirement of the BSCR or that company’s approved internal model. To enable the BMA to better assess the quality of the commercial (re)insurer’s capital resources, applicable (re)insurers are required to disclose the makeup of its capital in accordance with the “three-tiered capital system”. In order to minimise the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA expects that such insurers operate at or above a threshold capital level, which exceeds an insurer’s ECR.
Under this system, all of the (re)insurer’s capital instruments will be classified as either basic or ancillary capital, which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics. Highest quality capital will be classified as Tier 1 Capital; lesser quality capital will be classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital may be used to support the insurer’s solvency margins and ECR.
While not specifically referred to in the Insurance Act, the BMA has also established a target capital level (TCL) equal to 120% of its ECR. While an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA, and failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight.
The BMA has wide powers of supervision, investigation and inspection with respect to insurance companies. For example, it has the power to appoint a professional person to prepare a report on any aspect of any matter about which the BMA has required or could require information (such information being material to the performance of registered persons’ functions under the Insurance Act). If it appears to the BMA to be desirable in the interests of the clients of a person registered under the Insurance Act, the BMA may also exercise these powers in relation to any company which is or has at any relevant time been:
- a parent company, subsidiary company or related company of that registered person or designated insurer;
- a subsidiary company of a parent company of that registered person or designated insurer;
- a parent company of a subsidiary company of that registered person or designated insurer; or
- a company in the case of which a shareholder controller of that registered person or designated insurer, either alone or with any associate or associates, holds 50% or more of the shares or is entitled to exercise, or control the exercise, of more than 50% of the voting power at a general meeting.
The BMA’s general approach involves the application of more rigorous scrutiny and more onerous requirements where significant amounts of business are transacted with unrelated parties. In addition, there can be a greater reliance on transparency and ongoing disclosure where counterparties are sufficiently expert and sophisticated to be reasonably expected to understand and judge the underlying risks, and to determine their degree of tolerance for themselves.
Categories and Classes of Insurers
The Insurance Act distinguishes between insurers carrying on long-term business, insurers carrying on general business, and insurers carrying on special purpose business. Long-term business consists of insurance contracts covering life, annuity, accident and disability risks and certain other types of contracts. This does not include “excepted long-term business” (as such term is defined in the Insurance Act). Special purpose business includes insurance business under which an insurer fully funds its liabilities to its insureds through the proceeds of a debt issuance, cash, time deposits or other financing mechanism. General business is any insurance business that is not long-term or special purpose business, including accident and disability policies, in effect for less than five years.
There are eight general business classifications (Classes 1, 2, 3, 3A, 3B, 4, IGB and IIGB), six long-term business classifications (Classes A, B, C, D, E and ILT) and three classifications of restricted special purpose insurer, unrestricted special purpose insurer and the collateralized insurer (SPIs), which can be classified as either general business or long-term business.
Insurers are sub-divided into three categories, namely captive insurers (Classes 1, 2, 3, A and B) (Captive Insurers), commercial insurers (Classes 3A, 3B, 4, C, D and E) (Commercial Insurers) and special purpose insurers. The IGB, IIGB and ILT categories can be either captive insurers or commercial insurers.
In general, insurers proposing to carry on general business will be registered as follows.
A Class 1 insurer is:
- wholly owned by one person and intends to carry on insurance business consisting only of insuring the risks of that person; or
- an affiliate of a group and intends to carry on insurance business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders.
A Class 2 insurer is:
- wholly owned by two or more unrelated persons and intends to carry on insurance business not less than 80% of the net premiums written in respect of which will be written for the purpose of:
- insuring the risks of any of those persons or of any affiliates of any of those persons; or
- insuring the risks which, in the BMA’s opinion, arise out of the business or operations of those persons or any affiliates of any of those persons; or registrable as a Class 1 insurer, but for the fact that:
- not all of the business which it intends to carry on, but at least 80% of the net premiums written, will consist of the business described under the requirements for a Class 1 insurer; or
- it intends to carry on insurance business not less than 80% of the net premiums written in respect of which will, in the BMA’s opinion, arise out of the business or operations of the person by whom it is owned or any of the affiliates of that person.
A Class 3 insurer is not registrable as a Class 1, Class 2, Class 3A, Class 3B, Class 4 insurer or Special Purpose Insurer.
A Class 3A insurer intends to carry on insurance business in circumstances where:
- 50% or more of the net premiums written, or 50% or more of the loss and loss expense provisions, represent unrelated business; and
- total net premiums written from unrelated business are less than BMD50 million.
A Class 3B insurer intends to carry on insurance business in circumstances where:
- 50% or more of the net premiums written, or 50% or more of the loss and loss expense provisions, represent unrelated business; and
- total net premiums written from unrelated business are BMD50 million or more.
A Class 4 insurer:
- has total statutory capital and surplus of not less than BMD100 million; and
- intends to carry on insurance business including excess liability business or property catastrophe reinsurance business.
A Class IGB insurer intends, at the time of its registration, to carry on general business in an innovative and experimental manner where as a Class IIGB insure intends to carry on business in an innovative manner.
In general, insurers proposing to carry on long-term business will be registered as follows.
A Class A insurer is:
- wholly-owned by one person and intends to carry on long-term business consisting only of insuring the risks of that person; or
- an affiliate of a group and intends to carry on long-term business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders.
A Class B insurer is:
- wholly-owned by two or more unrelated persons and intends to carry on long-term business, not less than 80% of the premiums and other consideration written in respect of which will be written for the purpose of:
- insuring the risks of any of those persons or of any affiliates of any of those persons; or
- insuring risks which, in the BMA’s opinion, arise out of the business or operations of those persons or any affiliates of any of those persons; or
- registrable as a Class A insurer, but for the fact that:
- not all of the business which it intends to carry on, but at least 80% of the premiums and other considerations written, will consist of the long-term business described under the requirements for a Class A insurer; or
- it intends to carry on long-term business, not less than 80% of the premiums and other considerations written in respect of which will, in the BMA’s opinion, arise out of the business or operations of the person by whom it is owned or any of the affiliates of that person.
A Class C insurer has total assets of less than BMD250 million and is not registrable as a Class A or Class B insurer.
A Class D insurer has total assets of BMD250 million or more, but less than BMD500 million, and is not registrable as a Class A or Class B or Class C insurer.
A Class E insurer has total assets of more than BMD500 million and is not registrable as a Class A or Class B insurer.
A Class ILT insurer intends at the time of its application for registration to carry on long-term business in an innovative and experimental manner.
There are two key steps involved in registering an insurance company in Bermuda.
Step 1 – Application approval
An application is made to the BMA’s Insurance Licensing Advisory Committee (ILAC) for approval of the insurance programme. This application must be submitted to the BMA by close of business on the Monday of the week of the ILAC’s meeting on the ensuing Friday. The application will include the following:
- business plan;
- Form 1B;
- pro forma financial projections;
- loss reserve specialist analysis, if required;
- Bermuda solvency capital requirements calculation, if required;
- resumés and personal declaration forms for directors and officers; and
- acceptance letters and CVs of the service providers (ie, principal representative, insurance managers, auditors, and loss reserve specialists, as applicable).
Step 2 – Registration
Once the BMA has approved the application, an application is then made to the BMA for the company to be registered as an insurance company. This application will include the following:
- business plan (as revised, if applicable);
- Form 1B signed by two directors and the principal representative;
- acceptance letters and CVs of service providers (if not already provided);
- proof of capital being paid into the company; and
- registration fee.
Generally, the insurance company can be approved for registration and registered within 14 days of submission of the application. It is worth noting, however, that the application process may take longer if the BMA requires additional information or defers or declines the application. As the ILAC meets once a week (every Friday), each deferral by the BMA for further information will postpone registration by at least a week.
Insurers must also meet the “minimum criteria” for registration as follows:
- officers and controllers meet a fitness and propriety test;
- suitable corporate governance policies and processes must be established according to the nature, risk profile, size and complexity of the insurer;
- a minimum of two individuals effectively direct the business of the insurer;
- there must be a suitable number of non-executive directors on the board of directors of the insurer;
- business must be conducted in a prudent manner;
- the position of the insurer within the structure of any group to which it belongs does not obstruct effective consolidated supervision; and
- the business of the insurer is carried on with integrity and the professional skills appropriate to the nature and scale of the insurer’s activities.
The minimum margin of solvency for general insurers is calculated by reference to the greater of net premiums and discounted loss reserves and other insurance reserves. A minimum floor of BMD120,000 applies for single-parent captives and BMD100 million for Class 4 reinsurers. The minimum margin of solvency for long-term insurers is a proportion of assets reported on the insurer’s statutory balance sheet, subject to a minimum floor of BMD120,000 for single-parent captives and BMD8 million for Class E insurers.
An approved loss reserve specialist is to be appointed by all multi-parent captives and commercial insurers carrying on general business and a qualified actuary approved by the BMA must be appointed by all insurers carrying on long-term business.
Captive insurers’ reporting requirements include annual financial statements, and an annual statutory financial return comprised of:
- auditor’s report;
- solvency certificate;
- loss reserve opinion (general business multi-parent captives);
- actuary’s opinion (long-term business multi-parent captives);
- declaration of compliance;
- underwriting analysis; and
- own risk assessment.
Commercial insurers’ reporting requirements include:
- annual financial statements (GAAP);
- annual capital and solvency return (comprising a version of the insurer’s Bermuda Solvency Capital Requirement (BSCR) model); and
- quarterly financial returns.
In addition to this, commercial insurers must offer proof that they:
- maintain assets sufficient to capitalise an “enhanced capital requirement” (based on the insurer’s BSCR model);
- satisfy a minimum portion of their enhanced capital requirement with qualifying tiers of eligible capital;
- maintain a head office in Bermuda;
- have conducted the commercial insurer’s solvency self-assessment;
- have prepared and published a financial condition report and declaration executed by the CEO of the insurer and any senior executive responsible for actuarial risk or risk management or internal audit or compliance function (to be made available on the insurer’s website (if applicable) or in hard copy to members of the public on request); and
- maintain a “target capital level” of 120% of enhanced capital requirement.
The Insurance Code of Conduct
All insurers must comply with the BMA’s Insurance Code of Conduct (Code), setting out the duties, requirements and standards with which insurers are to comply when conducting business.
The Code requires insurers to establish and maintain a sound corporate governance framework, providing for appropriate oversight of the insurer’s business and adequately protecting policyholder interests. The Code further requires the board of directors of an insurer that employs an insurance manager to ensure that such insurance manager meets the fitness and propriety tests. Moreover, the board of directors and chief and senior executives are required to adopt an effective risk management strategy and an internal controls framework that has regard for international best practice on risk management and internal controls. The Code sets out particular governance mechanisms that are to be embedded in the corporate governance framework as part of the insurer’s obligation to conduct business in a prudent manner, including parameters on outsourcing of key roles. As there are varying risk profiles of insurers, the BMA interprets the Code based on the nature, scale and complexity of the business of each insurer.
Insurance intermediaries, including insurance managers, brokers, agents or insurance marketplace, or their innovative counterparts – IA, IB, IM, or IMPs (collectively, Insurance Intermediaries) must comply with the respective BMA code of conduct. Insurance Intermediaries can be either a natural person or a body corporate. The Insurance Intermediary must also meet minimum criteria for registration. This includes the fitness and propriety of controllers, which is assessed by reference to the competence and capability, and the honesty, integrity and reputation of the officer controllers. Insurance Intermediaries must maintain adequate professional indemnity insurance but are not otherwise subject to any prudential requirements.
Every insurance company registered in Bermuda, even those that do not have a physical presence on the island, must appoint a principal representative. A principal representative can take the form of a natural person or body corporate (but more often than not a body corporate). Commonly, the insurance manager of an insurer also acts as the insurer’s principal representative, but it is possible for the two roles to be fulfilled by two separate entities. The BMA must approve the appointment of a principal representative by an insurer.
The principal representative exists so that the BMA can have some identified individual or company present in Bermuda to whom it can look in respect of an insurer’s affairs. The principal representative has specific statutory obligations including the requirement to report certain events to the BMA, breach of which constitutes an offence under the Insurance Act. In particular, the principal representative must report the insolvency or likely insolvency of the insurer, the breach by the insurer of any law or the insurer’s licence, the breach of any condition or solvency margin of the insurer, or the failure by the insurer to adhere to certain other directions of the BMA.
Subject to any directions given by the BMA to the contrary, every insurer must appoint and maintain an auditor approved by the BMA. Insurers must have their statutory financial returns audited annually by an approved auditor. Under prevailing policy the BMA will only appoint individuals or firms resident in Bermuda as approved auditors.
Loss Reserve Specialist
The Insurance Act stipulates that in certain instances a loss reserve specialist (LRS) who is approved by the BMA must opine on the insurer’s loss reserves. The LRS is usually an actuary and must be independent from the actuary who sets the reserve levels. This opinion gives the BMA additional assurance concerning the level of reserves carried by the insurer.
Insurers registered as long-term insurers must appoint an actuary in accordance with the Act, and have this appointment approved by the BMA. The primary role of the approved actuary is to opine on the adequacy of the total long-term business insurance reserves, reflected in insurers’ statutory financial statements and statutory financial returns, and any other matters specified by the BMA.
2.2 The Writing of Insurance and Reinsurance
See 2.1 Regulatory Bodies and Legislative Guidance.
3. Overseas Firms Doing Business in this Jurisdiction
3.1 Overseas-Based Insurers or Reinsurers
Establishing a Physical Presence in Bermuda
In Bermuda, it is possible to have a fully operational office up and running on the island within two months. While there is no requirement that an exempted company establish a physical business office in Bermuda, many do so in order to further strengthen the company’s independence and legal identity, to confirm that the central management and control of the company actually resides in Bermuda, and to be part of the growing industry presence on the island.
Whether an overseas company requires a permit is frequently a question of fact to be determined in the light of those activities that are, or are intended to be, carried on, by or on behalf of the company, in or from Bermuda. An overseas company will be deemed to be engaging in, or carrying on, a trade or business in Bermuda if it occupies premises in Bermuda, or if it makes known by way of advertisement, or by an insertion in a directory, or by means of letterheads, that it may be contacted at a particular address in Bermuda, or if it is otherwise seen to be engaging in, or carrying on, a trade or business in or from Bermuda on a continuing basis. An overseas company will not be deemed to be carrying on business in Bermuda simply because meetings of its officers or shareholders are held in Bermuda, or because the company acquires, holds and deals in all types of securities issued or created by a Bermuda entity.
Head Office Requirements
The Insurance Act was amended in 2016 to require Commercial Insurers to establish and maintain their head office in Bermuda. In determining whether Commercial Insurers have complied with the head office requirements, the BMA considers the following six factors:
- where the underwriting, risk management and operational decision making of the insurer occurs;
- whether the presence of senior executives who are responsible for, and involved in, the decision making related to the insurance business of the insurer are located in Bermuda;
- where meetings of the board of directors of the insurer occur;
- the location where management of the insurer meets to effect policy decisions of the insurer;
- the residence of the officers, insurance managers or employees of the insurer; and
- the residence of one or more directors of the insurer in Bermuda.
The BMA will apply the proportionality principle when it considers the above factors in determining whether the insurer, based on the nature, scale and complexity of its business, has met the head office requirement.
The head office requirement does not apply to a Commercial Insurer that has a permit under the Non-Resident Insurance Undertakings Act 1967 or a permit under Section 134 of the Companies Act 1981. These provisions cover branch operations in Bermuda for foreign insurers.
Non-resident Insurance Undertakings
There are a few representatives of overseas carriers in Bermuda, commonly referred to as non-resident insurance undertakings (NRIUs). Most NRIUs have engaged agents in Bermuda who receive commissions on premiums written. Most of these premiums arise out of the sale of life insurance policies.
The NRIU Act applies to any undertaking conducting insurance business of any kind, other than:
- a company incorporated in Bermuda under any Act; or
- any other person or body of persons ordinarily resident in Bermuda, conducting insurance business from a place of business in Bermuda as principals to the insurance business undertaken in Bermuda and authorised by law to do so.
The term “insurance business” is defined in the NRIU Act to include:
- making out or executing policies of insurance or insurance contracts;
- receiving any premium or giving credit therefor;
- receiving any other consideration therefor;
- paying out any sums under a policy of insurance or insurance contracts; and
- entering into or inducing or attempting to induce any person to enter into or take out any policy of insurance or insurance contract by advertisement or otherwise.
NRIUs are required to act in accordance with the permit that is issued pursuant to the NRIU Act. The permit may be limited in duration to a time specified in the permit and shall be granted subject to other such conditions or limitations as the Minister may think fit to impose and as are cited in the permit.
Economic Substance Requirements
The Council of the EU adopted a resolution on a Code of Conduct for business taxation, the aim of which is counteracting the effects of zero tax and preferential tax regimes around the world. In 2017 the Code of Conduct Group (Code Group) investigated the tax policies of both EU member states and third countries, assessing tax transparency; fair taxation; and implementation of anti–BEPS measures. Following assessment by the Code Group, Bermuda was included in a list of jurisdictions which are required to address the Code Group’s concerns about “economic substance”. Like their counterparts in BVI, Cayman, Guernsey, Jersey and Isle of Man, the government of Bermuda has been working closely with the Code Group to ensure that those concerns are adequately addressed. As a result of this engagement, the Economic Substance Act 2018 (Substance Act) and the Economic Substance Regulations 2018 (Substance Regulations) became operative on 31 December 2018.
Which Entities are Subject to the Substance Act?
The Substance Act applies to “registered entities”, which means:
- companies incorporated under the Companies Act 1981;
- companies formed under the Limited Liability Company Act 2016;
- partnerships (exempted, exempted limited or overseas) which have elected to have separate legal personality under Section 4A of the Partnership Act 1902.
A registered entity will be in scope of the Substance Act if it conducts a relevant activity. The relevant activities are:
- fund management;
- financing and leasing;
- distribution and service centres;
- holding entity; and
- intellectual property.
Economic Substance Requirements
A registered entity conducting a relevant activity will satisfy the economic substance requirements if:
- it is managed and directed in Bermuda;
- core income generating activities (CIGA) are undertaken in Bermuda in relation to the relevant activity;
- it maintains adequate physical premises in Bermuda;
- there are adequate full time employees in Bermuda with suitable qualifications; and
- there is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.
How Will a Company be Assessed on Compliance?
The Minister of Finance will determine whether a company is compliant with the economic substance requirements based on the information provided in the annual filing. Registered entities which are in scope of the Substance Act will be required to file on an annual basis, an economic substance declaration (Declaration) with the Registrar of Companies (Registrar). The Declaration will include the following information:
- the nature and extent of the relevant activity including the CIGA undertaken by the relevant entity;
- the nature and extent of the entity’s presence in Bermuda;
- whether the entity is managed and directed in or from Bermuda;
- the nature and extent of outsourcing arrangements to affiliates or service providers.
How is “Adequate” to be Assessed?
The Substance Act does not impose a minimum annual expenditure nor a minimum number of employees in order to satisfy the economic substance requirements. Rather, “adequacy” will be assessed based on the particular circumstances of the entity.
Compliance and Enforcement
The Registrar will have monitoring and enforcement powers under the Registrar of Companies (Compliance Measures) Act 2017 and will have the power to fine an entity for non-compliance. Continued failure to meet the economic test may result in higher fines and could lead to the Registrar applying to the Bermuda Court to make an order requiring a non-compliant entity to take action to satisfy economic substance requirements including to prohibit business activity.
The commencement date for the Substance Act is 1 January 2019 and the new regime will be immediately applicable to new registered entities incorporated or registered after this date. For existing companies, there will be a six month transitional period. The first reporting will commence in 2020.
Relevant Activity of Insurance
The Substance Regulations sets out the CIGA applicable to Insurance as including the following:
- predicting and calculating risk;
- insuring or re-insuring against risk;
- providing client services; and
- preparing regulatory reports.
The Substance Regulations provide that any entity which is registered under the Insurance Act will comply with the economic substance requirements if: it complies with its corporate governance obligations under the Companies Act (for example with respect to shareholder meetings, maintenance of financial records, maintaining required company registers and so on); and complies with the applicable regulations and rules (including under the Code of Conduct) of the Insurance Act.
4. Transaction Activity
4.1 M&A Activities Relating to Insurance Companies
The Bermuda insurance industry saw several billion-dollar acquisitions made in 2018. Thus far, 2019 has been a quieter affair but has still seen Convex Group, a Bermuda-based property and casualty insurance company, securing over USD1 billion of investment from Onex Partners V LP. Various other fund managers have also been actively investing in the sector, purchasing minority stakes in a range of Bermuda-based insurers. Bermuda was also heavily involved in one of the largest sector deals of the year, the USD2.2 billion purchase of Vivat NV, the Netherlands-based insurance provider. Following intense interest, the company was eventually acquired by fellow Dutch insurer NN Group partnering with Bermuda’s Apollo Management, via Athora Holding. The joint purchase of Vivat was announced in June 2019 and is expected to close in the first quarter of 2020.
Two companies registered in Bermuda may amalgamate and continue as one company or merge and continue as one of the merging companies (hereinafter referred to as a business combination). A business combination requires each company to enter into an amalgamation or merger agreement as the case may be, which sets out the terms and means of effecting the business combination. In particular, the agreement must set out:
- in respect of an amalgamation, the provisions that are required to be included in the memorandum of the amalgamated company;
- in respect of a merger, any proposed amendments to the memorandum of the surviving company, or, if none is proposed, a statement that the memorandum of the surviving company immediately prior to the merger shall be its memorandum after the merger;
- the name and address of each proposed director of the amalgamated or surviving company;
- the manner in which the shares of each amalgamating or merging company are to be converted into shares or other securities of the amalgamated or surviving company;
- if any shares of an amalgamating or merging company are not to be converted into securities of the amalgamated or surviving company, the amount of money or securities that the holders of such shares are to receive in addition to or instead of securities of the amalgamated or surviving company;
- the manner of payment of money instead of the issue of fractional shares of the amalgamated or surviving company or of any other securities which are to be received in the amalgamation or merger;
- in respect of an amalgamation, whether the by-laws of the amalgamated company are to be those of one of the amalgamating companies and, if not, a copy of the proposed by-laws;
- in respect of a merger, any proposed amendments to the by-laws of the surviving company or, if none are proposed, a statement that the by-laws of the surviving company immediately prior to the merger shall be its by-laws after the merger; and
- details of any arrangements necessary to perfect the amalgamation or merger and to provide for the subsequent management and operation of the amalgamated or surviving company.
If shares of one of the amalgamating or merging companies are held by or on behalf of another of the amalgamating or merging companies, the amalgamation or merger agreement shall provide for the cancellation of such shares when the amalgamation or merger becomes effective without any repayment of capital in respect thereof, and no provision shall be made in the agreement for the conversion of such into shares of the amalgamated or surviving company.
The directors of each company involved in a business combination must submit the amalgamation or merger agreement, as the case may be, before the shareholders of their respective companies, and gain shareholder approval before the amalgamation or merger agreement can be effected and the amalgamated or surviving company can be registered by the Registrar. Special attention should be paid to the provisions of the by-laws of the respective companies that apply to meetings. Appropriate notice must therefore be given to the shareholders, and they should also be sent a summary of the amalgamation or merger agreement and a statement of the fair value of their shares.
At the meeting, each share of an amalgamating or merging company is entitled the right to vote, irrespective of whether it carries that right and, if the amalgamation or merger agreement contains a provision that would constitute a variation of the rights attaching to any class of shares, then the holders of such shares are entitled to vote separately as a class. Unless the provisions of the by-laws provide otherwise, the resolution of the shareholders or class must be approved by a majority of 75% of those voting at the meeting, where the quorum is two people holding (or representing by proxy) more than one third of the issued shares of the company (or the class).
Should the amalgamation or merger agreement receive approval then the dissenting shareholders are entitled to receive the merger consideration and, if they are not satisfied that they have been offered fair value, then they may apply to the court within one month of the notice of the meeting to assess the fair value of their shares. Costs of such an application are discretionary. The company can then either pay the value determined by the court or terminate the agreement. Should the amalgamation or merger have proceeded prior to the court appraisal then the amalgamated or surviving company must pay the difference between the amount paid to the dissenting shareholder and the value determined by the court.
An amalgamation or merger agreement may provide that at any time before the issue of a certificate of amalgamation or merger the agreement may be terminated by the directors of an amalgamating or merging company, notwithstanding that approval may have already been given by the shareholders.
The regulatory authority responsible for registering mergers and amalgamations pursuant to the Companies Act is the Bermuda Registrar of Companies. For insurance companies, a BMA “no objection” or some form of notification will also be required as the BMA must remain informed of all the controllers of all registered insurers in Bermuda and any material changes to them. A “controller” for this purpose means:
- the managing director of the registered insurer or its parent company;
- the chief executive of the registered insurer or of its parent company;
- a 10%, 20%, 33% or 50% “shareholder controller”; or
- any person in accordance with whose directions or instructions the directors of the registered insurer or of its parent company are accustomed to act.
The definition of shareholder controller is set out in the Insurance Act but generally refers to a person who holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or its parent company; a person who is entitled to exercise 10% or more of the voting power at any shareholders’ meeting of such registered insurer or its parent company; or a person who is able to exercise significant influence over the management of the registered insurer or its parent company by virtue of its shareholding or its entitlement to exercise, or control the exercise of, the voting power at any shareholders’ meeting.
7. Alternative Risk Transfer
7.1 ART Transactions
Bermuda is the world’s leading domicile for insurance-linked securities (ILS) transactions. With a highly regarded regulatory framework, sophisticated legal system, developed infrastructure and global companies with a physical presence, Bermuda maintains a reputation as a quality jurisdiction that has demonstrated its ability to respond to changes in market conditions while meeting its clients’ commercial needs.
The BMD100 billion ILS market has proven to be both relevant and reliable after the heavy catastrophe losses around the world in 2017 and 2018. The latest figures for 2018 establish that there has been over BMD10 billion in catastrophe bond covers written. According to the Bermuda Stock Exchange, Bermuda has the largest depository of ILS listings with more than 80% of global capacity at 30 September 2018.
Bermuda has been in the ILS market for more than 20 years and was involved in some of the first deals in the mid-1990s. The influx of capital has been the main catalyst for the growth of the ILS market. Many investors are now developing their own modelling and due diligence capabilities and cedants are now sponsoring deals as a way of securing more competitive prices.
Some of the more common ILS structures in today’s market are as follows:
- Catastrophe bonds – the capital market alternative to traditional catastrophe reinsurance that use fully collateralised SPI to transfer a defined set of risks from an insurer to capital market investors. Initially, catastrophe bonds were structured to offer high yields for investors with high risk appetites and only covered a single peril. Nowadays, catastrophe bonds tend to cover a multitude of perils and are structured as low risk/investment grade by offering over-collateralisation or guarantees from third party insurers.
- Reinsurance sidecars – fully-collaterised special purpose insurers created to purchase some, or all, of an insurance policy in order to share in the profits and risks. The ceding insurer or reinsurer, who cedes risk to the reinsurance sidecar, normally pays its premiums for the coverage up-front, allowing investors to profit from the premium return with their collateral exposed for the duration of the underlying reinsurance contracts. Reinsurance sidecars used to be formed as joint ventures between existing insurance or reinsurance companies, but increasingly have been used as a convenient deployment vehicle for third party capital in the reinsurance underwriting business.
- Contingent capital structures – these offer insurers the option to raise capital during a defined commitment period based upon the occurrence of a qualifying event. Should the qualifying event occur, investors provide the insurer with capital determined by the amount of catastrophic loss and if no catastrophic event occurs, there is no exchange of funds. Because low-probability, high-severity event insurance tends to be scarce or uneconomic, contingent capital can be a cost-efficient solution for a company needing liquidity relief.
- Extreme mortality bonds – these enable the issuer to protect itself from large deviations in longevity or mortality due to deaths from disease, war, terrorism or natural catastrophes. These bonds are structured similarly to other asset-backed securities, with deviations in mortality serving as the trigger.
- Longevity swaps – these transfer the risk of pension scheme members living longer than expected from pension schemes to an insurer or bank provider.
- Industry loss warranties – these are reinsurance contracts whose payouts are linked to a predetermined trigger of estimated insurance industry losses rather than their own losses from a specified event. They are essentially swap contracts.
10.1 Insurtech Developments
Insurtech is the insurance industry’s next evolution and, given that Bermuda has been at the forefront of providing innovative solutions in the insurance industry for decades, it is a natural progression for the jurisdiction.
The BMA has taken a proactive response to the growing insurtech market, anticipating the needs of current and future players. Leveraging Bermuda’s reputation as a centre of excellence for innovation in a sound regulatory environment, the BMA has launched two parallel innovation tracks initially targeted at the insurtech market – the insurance regulatory sandbox (Sandbox) and an innovation hub (Innovation Hub). The BMA has endeavoured to provide innovative solutions in the insurance industry to maintain Bermuda’s dominance in the global ILS and captive sectors.
The Insurance Regulatory Sandbox
The Sandbox is a space where companies can test new technologies and offer innovative products and services to a limited number of customers in a controlled environment and for a limited period of time.
The benefits of the Sandbox include:
- Providing a safe and transparent environment for companies to test their innovations and/or clarify regulatory requirements before seeking formal authorisation and going to market;
- Giving the BMA the opportunity to work together with the company to ensure that appropriate safeguards are incorporated in new products, services and delivery mechanisms before they are released to market;
- Increasing efficiency by reducing the amount of time and cost it takes for innovative products, services and delivery mechanisms to reach market; and
- Increasing innovators’ access to or improving the terms of, external funding by eliminating or reducing the cost of regulatory uncertainty for start-ups.
The Sandbox is available for entities registered, or proposing to become registered under Section 4 (insurer) or Section 10 (insurance intermediaries) of the Insurance Act. The BMA encourages using a separately incorporated company (subsidiary or joint venture) to carry out activities within the Sandbox.
How Does the Process Work?
An application is made to the BMA which must include, among other content:
- a cover letter highlighting how the minimum licensing criteria (per the Insurance Act for the relevant category of business) would be satisfied;
- constitutional documents;
- a business plan including details of any current or past participation in a regulatory sandbox (or similar) in any other jurisdiction/country, a description of the proposed product/service including how the Sandbox’s eligibility criteria (see below) are met and how the product/service or technology differs from those already existing in the market, legal and regulatory requirements that the company requests to be modified for the duration of the Sandbox (see below), and if writing long-term business, a copy of the company’s anti-money laundering and anti-terrorism financing policies and procedures must be provided; and
- net worth statements. A fee is payable on submission of the application.
The BMA will use the following eligibility criteria in evaluating the suitability of the company for entry into the Sandbox:
- the proposed product, service or business model should be new or use existing technology in a different way. The company should demonstrate that the solution it is offering is innovative or significantly different from existing solutions already in the market (ie unique);
- the company should have conducted research and due diligence on the proposed product or service, understand the applicable regulations and have the appropriate risk mitigation plans in place. Through the research already conducted, the company should be able to demonstrate clear benefits of the proposed product or service to the policyholder or industry;
- the company should clearly define its objective for testing the expected outcomes of the Sandbox proof-of-concept stage, and be committed to report to the BMA as agreed for the duration of the testing;
- the company should demonstrate its understanding and assessment of associated risks and their mitigation. Ensuring that policyholders and counterparties of companies involved in the testing phase are adequately protected against loss is of paramount importance to the BMA. The company should have a well-defined exit or transition strategy in case the testing is unsuccessful or discontinued; and
- the company should have the intention, ability and resources to deploy the proposed product, service or distribution channel upon successful testing and exit from the Sandbox. This should include demonstrating the ability to meet the applicable legal and regulatory requirements that will come into effect once the company exits the Sandbox.
Having reviewed a company’s proposal, the BMA will determine whether the company is suitable for entry into the Sandbox and the modifications to existing legislative and regulatory requirements that should be made for the duration of the Sandbox testing. The requirements have the potential to be modified during the Sandbox period, which allows companies to benefit from more flexibility during the product testing and refinement period. These are summarised in the table below.
Ultimately, the Sandbox will have appropriate safeguards to protect the customers that participate in Sandbox testing.
The BMA will consider each application on a case-by-case basis and will typically respond within two weeks of the initial contact and then commence the application process.
Proof of concept, ie the Sandbox
Upon approval of concept, the company will be assigned a temporary licence and will be allowed to operate within the Sandbox. The company will be assigned a principal contact (BMA staff member) to assist throughout the duration of the Sandbox which typically lasts six to 12 months, although this period can be extended or terminated early with the approval of the BMA. The licences complement the current licensing regime whereby long-term insurers carry out business regarding insurance on human life, injuries sustained from accidents, etc and general business insurers carry out business which is not long-term or special purpose business and includes accident and disability policies in effect for fewer than five years.
The licences available are ILT, IGB, IM, IA and IB for long-term insurers, general business insurers, insurance managers, agents and brokers, respectively. On successful graduation from the Sandbox, the company will be re-licensed under an existing class of insurer or insurance intermediary (Class 1, 2, 3, 3A, 3B or 4 (if a general business insurer), Class A, B, C, D or E (if a long-term insurer), special purpose insurer, insurance manager, broker, agent or salesman).
A company must notify its clients that the products, services and delivery mechanism are operating in the Sandbox and disclose the associated key risks. The company is required to obtain a written acknowledgment from its clients that they have read and understood the risks associated with doing business with the company. The company should also maintain a client complaints log that must be made available to the BMA on request.
Upon completion of the proof-of-concept phase, the company must submit a final report to the BMA on the outcomes of the testing. After review of the report and approval for the company to commence operations outside of the Sandbox by the BMA, the company will then decide whether it will offer the new solution outside the Sandbox. If the company’s business plan is approved by the BMA and the company wishes to commence business outside of the Sandbox, the company will be issued a licence in accordance with the company’s business model and existing insurance licence regime (as outlined above).
The Innovation Hub is a platform for exchanging ideas and information; it facilitates dialogue between the BMA and market participants. This space is intended for activities that are not directly regulated by the BMA or where a company is still developing its thoughts and ideas and not yet prepared for proof of concept and is therefore not ready to apply for entry into the Sandbox. There is a dedicated working group for the insurance sector called the BMA insurance innovation working group.
The Innovation Hub is initially aimed at companies seeking to create innovative insurance solutions; however, it will be expanded to include other financial technology start-ups more broadly in the future.