Mergers and acquisitions (M&A) in the Asian insurance sector have been buoyant in the past decade. In particular, sale and purchase of local and international insurance companies, and overseas expansion by Chinese insurers, have contributed to the rapid growth of outbound investment. According to data from Thomson Reuters, outbound M&A investment by Chinese insurers doubled last year to US$11 billion.
Although outbound investment has been generally affected by restrictions on capital outflow and foreign currency conversion introduced last year, large and solvent insurers with healthy balance sheets are more likely to obtain approvals for their expansion plans. Bermuda has been at the forefront of these activities.
With its strong and adaptive legal and regulatory framework, which meets international standards and ensures a high degree of compliant behaviour, Bermuda has the potential to become a leading insurance and reinsurance centre for Asian insurers and investors.
Innovative regulation. Being a leading domicile for insurance business, Bermuda has introduced legislative and regulatory changes to adapt to prevailing trends in the global insurance market. Its insurance licensing and regulatory regime is primarily regulated by the Insurance Act 1978 (Insurance Act) and related regulations, which are applicable to any person carrying out insurance business in, or from within, Bermuda. Broadly, this covers entities carrying on insurance business within the domestic economy and those carrying on non-domestic insurance business from an office in Bermuda, regardless of where such entities are incorporated or whether they are predominantly owned by Bermudians.
Any insurance broker, manager, agent or salesperson carrying out business in, or from within, Bermuda is regulated under the Insurance Act. The act enhances the credibility of Bermuda as a first-class international centre for insurance, reinsurance, captive insurance and related investments.
Further changes were introduced in 2016, which require the insurance business of certain classes of commercial insurers to be directed and managed from Bermuda. The requirement of having a head office in Bermuda, for instance, came about as part of the jurisdiction’s enhancements to its regulatory regime in order to achieve Solvency II equivalence.
Solvency II finds its origin in the financial crisis of 2007-2008. Following calls for preventing excessive risks within the financial system, the EU identified shortcomings in national supervisory models. The Solvency II directive sets up a risk-based prudential regime that regulates capital, governance and supervision, and disclosure and transparency requirements, for the insurance and reinsurance industry.
Bermuda has been granted equivalent status under the Solvency II directive, besides being approved as a qualified jurisdiction by the US National Association of Insurance Commissioners. The benefit of Solvency II recognition is that commercial insurers based in Bermuda will not be competitively disadvantaged when they conduct business within the EU. Bermuda has taken significant steps to place itself as a benchmark for regulation and innovation.
Such international regulatory standards echo the anticipated strict enforcement of risk control by the China Insurance Regulatory Commission, China’s insurance regulator, driven partly by the country’s general crackdown on capital outflows and partly by the dismissal in April this year of the agency’s chairman for disciplinary violations. With this backdrop of greater scrutiny, Chinese insurers and investors that are engaged in M&A activities and overseas expansion will find assurance in Bermuda’s insurance and reinsurance industry, which operates in a legal and regulatory environment that is on par with Europe and the US and, when measured against other offshore jurisdictions, stands in a peer group of one.
Largest captive insurance market. Bermuda is the pioneer of captive insurance and remains the largest captive domicile overall with more than 1,200 registered captives, an increase of 38% on last year. A captive insurer is an insurance company that is wholly owned and controlled by its insureds. The risks of its owners are insured by the captive companies, while the owners benefit from the captive companies’ underwriting profits.
Different categories of captive insurance have been developed in Bermuda, reflecting variations in the formation and structure of the insurer group, composition of risks insured, or relevance of risks to the business of the group. There are a number of advantages of captive insurance – lower risk management costs, improved cash flow, and reduced tax liabilities to name a few.
Being one of its core insurance activities, captive insurance business in Bermuda is subject to an effective regulatory regime that meets high international standards. Its insurance legislation is well equipped for companies to be incorporated easily, while at the same time ensuring that such companies fulfil strict regulatory requirements, such as maintenance of sufficient reserves, to meet the demands of all potential claims.
The Bermuda Monetary Authority (BMA) and, in particular, its insurance division, is well regarded for its ability to strike a balance between the maintenance of a robust regulatory regime and the cultivation of an attractive market for insurance business. The BMA’s proactive and collaborative approach to supervision has always been one of the major attractions of Bermuda as a leading insurance centre.
While the majority of Bermuda’s captives are US-owned entities, the past few years have seen an increasing proportion of captive business from Asia. A number of China’s largest state-owned enterprises have established captive insurance companies as part of their global risk management policy following rapid international expansion. Given the reputation and maturity of the Bermuda captive insurance business, the jurisdiction is an excellent choice for Asian insurers and investors.
Similar to many other types of business, demand for sophisticated yet flexible insurance products and services in Asia, particularly China, has been growing rapidly. With a robust and adaptive legal and regulatory regime, innovative products such as captive companies and insurance-linked securities, and a proactive and well-regarded regulatory body, Bermuda is best placed to offer its value and experience to the emerging insurance industry in Asia.
Fiona Chan is a partner at Appleby in Hong Kong. She can be contacted on +852 2905 5760 or by email at [email protected]