Staying ahead of the curve

Opening the 13th annual Bermuda Captive Conference, which attracted more than 750 attendees, David Gibbons, chair of the conference and partner and captive insurance leader at PwC Bermuda, suggested that Bermuda is so successful because it “creates the changes that others adapt to”.

The island, which classes itself as the number one global captive domicile, believes that its ‘work together and innovate together’ attitude also contributes to its success.

Bermuda’s Premier David Burt was welcomed on stage to discuss the island’s captive insurance industry.

Premier Burt said: “Bermuda is home to nearly 800 captive insurance companies, supporting primarily fortune 500 corporations in the US and generating $55 billion in annual gross written premiums.”

“It is a market that has long been a symbol of global excellence to corporations around the world and which has provided captive services for half a century.”

The premier added: “Bermuda is a mature insurance market, not just the leading domicile for captive insurance, but also home to a vibrant commercial insurance industry and a world capital for global reinsurance. You cannot find that focus of industry talent in any other captive domicile.”

A study conducted by PwC for the Bermuda Insurance Management Association (BIMA), released in time for the annual conference, revealed that the Bermuda captive insurance industry contributes an estimated $174 million every year to the island’s economy.

The study found that the sector directly employs at least 557 people in Bermuda and generates a minimum fee income of $139 million each year.

In addition, $35 million is contributed annually by captives to the Bermuda government, regulators, local suppliers and commercial property owners, as well as hotels and other business hospitality vendors.

The study revealed that Bermuda was home to 776 active licensed captive insurers in 2016, generating $55.3 billion in annual gross written premiums.

According to the research, 2016 showed stability compared to 2015, with registration levels consistent with the overall captive market. New registrants came mainly from the traditional US market, but also included setups from Latin America, a key emerging market.

Service generated by captive companies totalled $139 million, in the form of management, legal and corporate secretarial, actuarial, audit, investment management and banking fees.

A further $35 million included $16.4 million in payroll tax and social insurance contribution; $315,000 in work-permit fee income; $5.3 million in annual business fees to the Bermuda Monetary Authority; $6.74 million in commercial rent; $3 million in hotel revenue; $1.8 million in restaurant and food spend; and an estimated $200,000 per year on local taxis.

Gibbons said: “The survey [shows] the continued importance of the time the private sector and Bermuda Business Development Agency (BDA) have invested in protecting and growing the industry, both in traditional markets (US and Europe) as well as Latin America and Canada.”

In a separate session, focusing on the Latin American market, it was revealed that the region continues to show steady growth in captive creation.

Panellists Alejandro Santos, leader of analytics and captives at Marsh Global Analytics and Captive Solutions, Giuliana Solari, senior manager at PwC, Javier Namihira, senior associate at Baker & McKenzie, Esperanza Mead, principal at Actuarial Factor and Luis Portillo, underwriter of JLT Insurance Management, revealed that over the last three years, the Latin America region has seen an average of 10 to 12 percent growth.

The leading industries creating business in the captive market for the Latin America region include manufacturing, energy, financial institutions, and food and beverages.

The panel explained that drivers for captive insurance in the Latin America market include sophistication of risk management, growth of multinationals, more efficient access to reinsurance, new sources of revenue, and writing unrelated risk as an additional line of business.

The main countries doing captive business in Latin America are Columbia, accounting for 40 percent of the business, Mexico with 30 percent, and Chile and Peru, accounting for 10 percent apiece. The other 10 percent of business is conducted in countries such as Guatemala, Argentina and Ecuador.

The panel also revealed that Bermuda remains the top domicile for Latin American captives, although other domiciles such as Barbados and the Cayman Islands are also used.

The reason Bermuda is a popular choice is down to its tax information exchange agreements, which allow for more transparency and improve the reputation of the domicile, according to the panel.

Although Latin America has seen growth, the region still faces challenges in the market such as fronting fees, local currency devaluation and including the lack of education on the captive concept.

During another panel, titled Industry, Government and Regulatory Leaders Round-Table Discussion, Jeremy Cox, CEO of the Bermuda Monetary Authority (BMA) confirmed that the implementation of Bermuda’s Solvency II bifurcation was “definitely a success”.

Cox suggested that, since the implementation of Solvency II, the jurisdiction has had to recalibrate regulation and supervision, which has not just changed things in the commercial sector, but also in the captive sector.

He said: “We have done the best possible job of standing up and defending the number one pillar of our brand, by ensuring we have a credible regulatory and supervisory framework.”

Grainne Richmond, vice president of Dyna Management services and BIMA president, who moderated the panel, noted that after the implementation the island saw an uptick in business coming into the captive space, whether that was because of Solvency II or not, it “reinforced” the captive industry, she said.

Cox explained: “We have to look out and see what is going on in the rest of the world, there are so many things, if we were to ignore the new initiatives and just continue what we always did, I think Bermuda would put itself in a position where it is uncompetitive.”

“I think there are some jurisdictions that have chosen to do that and ... in my view, five years from now I highly doubt that they will have the same types of markets that they have today.”

European domiciles have also commented on the success of Bermuda’s Solvency II bifurcation.

In early September Cox attended a meeting in Brussels with European regulators and industry representatives. He said at the conference: “At the end of discussions, two or three people came up to me and said they wanted to meet me, because what Bermuda achieved in terms of Solvency II equivalence was phenomenal.”

Cox also suggested that Bermuda is working to address further regulatory requirements and assessments that are in the pipeline.

He said: “It was a team effort to make this happen, and what is important about this process is that we do one thing very well when it comes to this industry, and that is keeping politics mostly out of it, which is a part of how we are able to get this done.”

Jamahl Simmons, minister of economic development and tourism, also revealed that Parliament was sitting earlier than normal to get some “important legislation” approved to ensure assessment requirements are addressed.

He commented: “The beneficial ownership bill will go to parliament in two or three weeks. There’s also the anti-money laundering bill. There are a number of things we have in the pipeline.”

“We are aware of the need to get this done. We have established a cabinet sub-committee that is biweekly, and that is updating on where everybody is and what we need to do to stay ahead of the curve.”

Other international challenges facing the island include an assessment from the Organisation of Economic Co-operation and Development (OECD), the EU’s Code of Conduct and the Caribbean Financial Action Task Force review.

Cox told attendees: “The minister is correct when he talks of staying ahead of the curve and making sure we are performing well in these assessments—and not just performing well, but performing above our peers. It’s critical to our reputation and relationships with the regulatory community.”

The recent spate of hurricanes in the Atlantic was also a discussion point.

Richmond commented: “The commercial and excess carriers may be covering in the high numbers, but captives will be covering their fair share, as well, whether it’s hardware-store owners, or hospitals that may have part of their property or business interruption covered via their Bermuda captive.”

She added: “While exact numbers are not yet known, it is agreed by all that the support the captive industry provides will be substantial.”

The conference also welcomed Butler University College of Business student Derek DeKoning, who has played a role in the set up of the first student-run captive.

The captive insurance company, which officially launched on 1 August, is domiciled in Bermuda and managed by Aon.

The aim of the captive is to give students hands-on experience and prepare them for an industry that is anticipated to need tens of thousands of new employees over the next seven years.

A panel, which included DeKoning, George Leite, head of business development at Aon Insurance Managers Bermuda and Sophia Greaves, director of Conyers, Dill & Pearman, addressed the insurance industry’s talent crisis.

Leite suggested that the industry needs to fill 400,000 jobs by 2020 because of imminent retirements in the industry and that’s why the Butler University student-run captive programme is so important.

According to DeKoning, the talent crisis is partly down to the lack of education about the captive insurance industry to millennials.

DeKoning said: “The biggest issue is a lack of knowledge of what the captive industry does and how it functions, some have no knowledge on the coverages that exist.”

“The average student could summarise the basics, but they have no insight into what the insurance industry does.”

He added: “I think Zach Finn, the clinical professor and director of the Davey Risk Management and Insurance Programme at Butler University, does this well.

He educates students to explain the huge depth in the industry and explains really fascinating pieces of what you can do. The Butler captive is a really good example of that.”

There needs to be more focus on risk management programmes at universities to help students receive the experience and education needed, DeKoning explained.

The Davey Risk programme has a 100 percent job placement record, which is positive for the insurance industry.

DeKoning said: “Dedicated staff, such as professor Zach Finn, who are willing to take of these types of projects and risks are what make them so successful.”
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