Guide to the Bermuda Insurance Market

314 Pages·2007·1.39 MB·English

by  Appleby Guide

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GUIDE TO THE BERMUDA INSURANCE MARKET
GUIDE TO THE BERMUDA INSURANCE MARKET
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GUIDE TO THE BERMUDA INSURANCE MARKET
GUIDE TO THE BERMUDA INSURANCE MARKET
© 2007 Appleby.
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of Appleby, application for which should be addressed to
Appleby at:
Appleby
Canon’s Court
22 Victoria Street
PO Box HM 1179
Hamilton HM EX
Bermuda
Tel [phone]
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GUIDE TO THE BERMUDA INSURANCE MARKET
TABLE OF CONTENTS
CHAPTER 1
OFFSHORE INSURANCE......................................................................................................1
CHAPTER 2
CAPTIVE INSURANCE COMPANIES...................................................................................7
CHAPTER 3
RENT-A-CAPTIVES AND THE USE OF SEGREGATED ACCOUNTS..................................15
CHAPTER 4
SPECIALISED INSURANCE VEHICLES ............................................................................23
CHAPTER 5
LIFE AND WEALTH ACCUMULATION PRODUCTS IN BERMUDA.........................................39
CHAPTER 6
PRIVATE ACTS...................................................................................................................47
CHAPTER 7
HOW TO FORM A BERMUDA INSURANCE COMPANY......................................................55
CHAPTER 8
DERIVATIVES AND SECURITISATION...............................................................................119
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GUIDE TO THE BERMUDA INSURANCE MARKET
CHAPTER 9
RAISING PRIVATE EQUITY/FINANCING..........................................................................125
CHAPTER 10
PUBLIC OFFERINGS...........................................................................................................129
CHAPTER 11
ESTABLISHING A PHYSICAL PRESENCE IN BERMUDA.................................................143
CHAPTER 12
INSURANCE LEGISLATION.............................................................................................167
CHAPTER 13
INSURANCE ACT COMPLIANCE.......................................................................................189
CHAPTER 14
INSURANCE REGULATORY ACCOUNTING .......................................................................211
CHAPTER 15
COMPANY LAW IN BERMUDA..........................................................................................243
CHAPTER 16
THE SEGREGATED ACCOUNTS COMPANIES ACT 2000..................................................259
CHAPTER 17
THE PRINCIPAL REPRESENTATIVE ................................................................................267
CHAPTER 18
KEY REGULATORY BODIES IN BERMUDA ........................................................................275
CHAPTER 19
ALTERNATIVE DISPUTE RESOLUTIONS FOR INSURANCE COMPANIES
IN BERMUDA.....................................................................................................................283
GLOSSARY..............................................................................................................................295
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OFFSHORE INSURANCE — CHAPTER 1
CHAPTER 1
OFFSHORE INSURANCE
A. INTRODUCTION
It is fair to say the perception of the offshore financial world varies tremendously. On the one
hand, a layman in Ohio or deepest England would have little or no understanding of the important
role of offshore companies and would naively view any ‘offshore’ jurisdiction with suspicion.
Sadly, this narrow observation is fuelled by sections of the international press which view any
offshore jurisdictions as ‘tax havens’ or, worse, as somehow ‘dodgy’. On the other hand, this view
can be starkly juxtaposed against professionals and large corporations throughout the world who
are intimately knowledgeable and familiar with the crucial role of offshore jurisdictions in the
world of finance.
Notwithstanding the contradictory perceptions of offshore jurisdictions, it is clear they are major
players and a key element in international finance. Nowhere is this more clearly apparent than in
Bermuda. Over the years, Bermuda has grown from a captive hub to the second largest reinsurance
market in the world. Truly, Bermuda is a vibrant and competitive market where underwriters and
executive officers are on the ground and actively binding risks in Hamilton.
In the face of the negative press coverage the question arises, how is it that a sector comprised of
jurisdictions which are often painted as ‘tax havens’ or ‘dodgy’, should not only survive but thrive
in the face of tremendous international public scrutiny? The truth is simply that every Fortune 500
company, most of the Fortune 1000 companies, and thousands of other enterprises and associations
of individuals (or simply wealthy private persons and trusts) take advantage of the facilities offered
by small islands and purpose-made international financial centres around the world. One has
only to examine the annual reports of most listed companies to discover in the notes, or in the list
of subsidiaries, that there are affiliates in Bermuda, Guernsey, Dublin or Luxembourg. However,
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even that does not tell the whole picture. The sophisticated transactions to which offshore companies
are frequently a central cog are not readily apparent from their public documents, but it is real,
and it is very important to the financing of international business in a world of uncertainties about
tax, creditworthiness, litigation and privacy in commercial transactions.
Of particular interest are the booming offshore insurance markets. Increasing numbers of captives
are being formed in Bermuda, the Cayman Islands, Guernsey, Isle of Man, Dublin and Luxembourg.
Likewise, an ever-larger portion of the world’s reinsurance business is being placed in Bermuda.
As noted earlier, Bermuda is the second-largest reinsurance market behind only New York,
underwriting billions of dollars worth of premiums each year. This is because offshore jurisdictions
have been able to offer a sound regulatory and low-tax environment, with sufficient controls to
maintain investor and public confidence.
But, what is meant by ‘offshore’? Surprisingly, this does not mean merely an island somewhere in
the Caribbean or the English Channel. Indeed, there are a number of jurisdictions firmly anchored
in a mainland somewhere, which, for some purposes, fall within the scope of offshore jurisdictions.
For example, non-domiciled individuals resident in England enjoy a very favourable tax treatment
and, for them, the United Kingdom is a tax haven! Further, Scottish limited partnerships can
supply particular benefits to American investors by taking advantage of the double taxation treaty
between the United Kingdom and the United States. In the Americas, land-locked states such as
Vermont and Colorado and the Canadian province of British Columbia, have established
themselves as captive domiciles giving special regulatory treatment to this category of company.
Other places, such as Luxembourg, Dublin and Israel, are clearly physically onshore, but they have
legislative facilities, which treat certain transactions differently from other major industrial
jurisdictions and provide, to the residents of those other jurisdictions, an opportunity to profit.
Indeed, Dublin is regularly considered an offshore jurisdiction, while clearly a member of the
European Community.
Obviously, however, the word ‘offshore’ must have come from somewhere and, indeed, it was
coined to describe the islands off the shore of the United States which, as early as the 1930s,
offered locations from which American business people could conduct their international affairs
and thereby minimise their tax and regulatory exposure back home. The term ‘offshore’ has come
to be extended to any jurisdiction offering tax or regulatory advantages which are significantly
different from those in the major economies. In relation to insurance, the principal offshore
jur isdictions are Bermuda, the Cayman Islands, Luxembourg and Ireland. However, in
understanding what an offshore jurisdiction is, one needs to look at the reasons why they developed.
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OFFSHORE INSURANCE — CHAPTER 1
B. REASONS FOR GOING OFFSHORE
1. Tax
For the professional, ‘offshore’ is now a structural tool in the efficient management of a company’s
affairs. The principal efficiency (and the one which has given rise to the loaded expression ‘tax
haven’) is, obviously, taxation. However, going offshore for ‘tax reasons’ does not mean to the
legitimate businessperson tax evasion, as many wrongly suppose it does. The governments of the
onshore economies have made escaping the tax net extremely difficult where the activities of a
business or an individual’s income are wholly connected with one jurisdiction. However, it is
where businesses are multinational or where income comes from a variety of jurisdictional sources
around the world that being in a tax-neutral or low-tax jurisdiction has a number of significant
advantages.
Increasingly, tax analysis is now properly focused on setting off against each other the provisions of
the tax laws of different jurisdictions, all or parts of which may govern aspects of a company’s
business or a division within its global group. Sometimes, this is known as ‘treaty shopping’ or
arbitraging the differences in tax regulations between onshore jurisdictions. One simply exploits
territorial limits of fiscal systems for legitimate international business purposes. That is to say, the
lack of worldwide harmonisation of fiscal systems, particularly with regard to unilateral and treaty
relief measures, produces a situation where connecting factors, connecting persons, places and
events to a tax consequence, are not merely of jurisdictional relevance, but may also give rise to
problems of double taxation or, through a deliberate change of one or more parameters, permit
the reduction of the global tax burden. It is the lack of uniformity which highlights that there is no
intrinsic sanctity regarding taxation; revenue authorities create devices and it is perfectly proper to
determine whether the devices apply in given circumstances. In this context, offshore jurisdictions
offer significant tax minimisation opportunities since the location of a taxable person or taxable
event in an offshore jurisdiction may:
• sever or interrupt the formation of a connecting factor with regard to one or more high tax
jurisdictions; and/or
• reduce the tax burden falling on a taxable person with regard to a taxable event by one or
more high-tax jurisdictions.
Notwithstanding the best efforts of the onshore governments, there are still ways in which residents
can achieve some tax economies offshore, particularly where the legal form of the offshore vehicle,
for example, a partnership, allows the enterprise to roll up profits, but the owners are treated as
individuals for tax purposes so that they do not suffer double taxation; firstly, at the enterprise
level and, again, at the personal level.
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