Bermuda’s Billion Dollar Captive Insurance Industry Sets Sights on Latin America

Bermuda has always been a leader in captive insurance, in which global firms establish subsidiaries to provide insurance services back to the parent organization and, sometimes, to its …

Bermuda has always been a leader in captive insurance, in which global firms establish subsidiaries to provide insurance services back to the parent organization and, sometimes, to its own customers. This form of risk management is becoming increasingly popular as the world adjusts to the effects of climate change and the growth in insurable assets and services; in fact, upward of 90 percent of Fortune 1000 companies are insured by their own captives.

“The captive market started because of business necessity,” says Hale Stewart of HS Captive Management. “Either companies couldn’t find insurance, or it was very expensive. With that in mind, brokers advised that it would be cheaper and more efficient to start your own insurance.”

Though there were versions of captive insurance in the United States in the 1950s, Bermuda set the stage in 1962 when International Risk Management Limited (IRML), now part of Aon Corporation, began operations. Today, Bermuda and the Cayman Islands can claim leadership in captive, commercial market insurance, and reinsurance – a cluster effect for risk financing that keeps them on the map as major players.

“Bermuda and the Cayman Islands are both British Overseas Territories,” says Stewart. “These are small jurisdictions with little need for infrastructure or a social safety net, which is one reason they can also offer tax advantages to captives.”

As it stands, Bermuda is the global leader when it comes to the captive insurance market, with almost a thousand captive management companies representing about 19 percent of the global total. The Cayman Islands are next, at just over 15 percent and 765 captives. This is a scalable model given that it is not labor intensive and only requires, for the most part, that the captive managers be resident in the jurisdiction. But the labor itself is highly skilled: a full service firm will provide deep management capabilities that involve a complex understanding of legal, tax, and insurance issues.

Regulatory Issues Dominate

This past June the Bermuda Captive Conference welcomed 600 delegates, with support provided by the Bermuda Monetary Authority and the Association of Bermuda Insurers and Reinsurers. The conference addressed a number of issues related to global risk financing, including the changing regulatory environment, privacy laws, and climate change.

“Insurers and reinsurers must now include the longer term effects of global warming,” says Stewart. “This is particularly a factor in the United States. If you look at the wind storm deductible in Florida now you can see that it is very high – this is directly attributable to hurricanes.”

As the industry becomes more complex, so too is more expertise required to deal with captive management strategies and governance issues, often in the context of insurance-linked securities and special purpose insurers. Bermuda saw a mini boom in its captive insurance market due to 9/11and hurricane Katrina, though concerns with regard to the globalization of financial crime have also led to a more rigorous approach to secrecy laws.

“The secrecy climate is changing, too” says Stewart. “The OECD was losing its tax base in the 90s but got nowhere until 9/11, which resulted in mutual assistance treaties that allowed for the sharing of financial information. Secrecy is going away, but tax arbitrage isn’t.”

Bermuda has held its own in the 21st century, with annualized growth of 1.3% and a stable political system. However, there is some concern, particularly in the highly competitive captive market, that from 2007 to 2011 productivity in Bermuda declined 0.7 percent annually, whereas the G7 average saw yearly average growth of 1.1 percent. To stay in the game Bermuda’s captive market is looking for opportunity among mid-market companies and those farther afield, with Latin America seen as a real opportunity.

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LatAm on the Rise

In Latin America, semi-governmental agencies, or companies guaranteed by a government, tend to dominate the captive market, with a heavy focus on commodities. Private sector diversification into other products and services is nascent, but is expected to emerge in the coming years. So far, there is no Latin American player of any significance.

Consequently, experts like Dr. Eugene Durenard from Capital G Investments have stated that the “one-stop” option from Bermuda and the Cayman Islands is still the best bet for Latin American companies looking for a captive set-up, noting that “they already have a track record in establishing some very sizable captives with Latin American ownerships.” With that in mind, however, Barbados is also a viable alternative – the island nation has over 5 percent of the global market and about 250 captives.

One challenge facing all three of these jurisdictions with regard to the Latin American market is addressing the different legal systems. Most captive jurisdictions are under legislation that follows Anglo Saxon common law, whereas Latin America has a separate civil law tradition. Dr. Durenard has noted that some kind of bridge between the two systems has to occur, and that firms in both the Cayman Islands and Bermuda have been hiring civil law lawyers to address the needs presented by Latin American clients. This trend is occurring as captive insurance strategies find greater appeal among smaller organizations.

“Captive insurance used to be a big company thing,” says Stewart from HS Captive Management. “In the past, only a Pepsi or a Coke would do it, but now there is growth in the mid-market, with more people offering the management service, and more people aware of the captive alternative.”

Bermuda has already signed tax information and exchange treaties with some Latin American countries, which will go a long way to building business confidence. The small island has only 64,000 residents – 50,000 citizens, and 14,000 expats – yet the Bermuda insurance market has combined assets of more than $450 billion, with gross premiums over $107 billion, and net premiums approaching $95 billion. In fact, Bermuda-based reinsurers are the largest suppliers of catastrophic reinsurers to US-based insurers, and hold 25 percent of United States medical liability insurance as well as about 30 percent of US crop insurance.

With that track record, it makes sense that captive providers in Bermuda would want to serve economies in Latin America that are building industrial sectors based on good and services, and with more assets in the hands of a growing middle class that, to date, has been underserved by the global insurance market.

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