Bermuda: Offshore jurisdiction sets the benchmark for regulation and innovation

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1 Bermuda: Offshore jurisdiction sets the benchmark for regulation and innovation In the current socio-economic climate, one could be forgiven for thinking that international businesses use offshore jurisdictions to conduct their activities under a veil of secrecy, taking advantage of passive legislation and benevolent regulators. How refreshing it is, therefore, that on March 24, 2016, the European Commission validated Bermuda s position as a preeminent centre for international business by awarding it with equivalent status under the Solvency II Directive (Directive 2009/138/EC, as amended) (Solvency II). This award came hard on the heels of another important accolade, this time from the opposite side of the Atlantic, where Bermuda has been approved as a qualified jurisdiction by the National Association of Insurance Commissioners (NAIC) the US standard-setting and regulatory support organisation created and governed by the chief insurance regulators from the 50 US States, the District of Columbian and five US territories. In addition, Bermuda is an early adopter of the OECD s common reporting standards (CRS) and recently signed-up to country-by-country reporting (CBC). The result is that Bermuda s (re)insurance industry 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. The recognition afforded to Bermuda is not an overnight success, but the result of considerable foresight and years of concerted effort by the Bermuda government, regulators and business community to align Bermuda s regulatory framework with the highest standards of international law and practice. What is Solvency II? The genesis of Solvency II was the financial crisis of , which exposed shortcomings in the supervision of the financial markets. In particular, the European Union (EU) identified national supervisory models as lagging behind financial globalisation, as well as shortcomings in the areas of cooperation, coordination, consistent application of EU law and trust between national competent authorities. As such, there was a call for a greater European supervision to reflect the integration of financial markets, with the intention that such measures would anticipate adverse macro-prudential developments and prevent the accumulation of excessive risks within the financial system. For participants in the (re)insurance industry, the result was Solvency II a risk-based prudential regime that came into operation on 1 January 2016 and which regulates the following pillars : (1) capital requirements; (2) governance and supervision; and (3) disclosure and transparency. What is the effect of equivalency under Solvency II? v1 1 of 5

2 Solvency II only applies to (re)insurance activity within the EU and so the advent of Solvency II heralded significant hurdles for (re)insurers based outside the EU, who would now be expected to provide additional collateral requirements for business ceded by EU companies. Many (re)insurers in non-eu jurisdictions roiled against these requirements, either because they were not prepared to comply with the strict requirements of Solvency II or because the level of their EUrelated business did not justify enacting measures to replicate Solvency II in their jurisdiction. However, Bermuda s (re)insurance industry operates on a global scale, with Bermuda-based (re)insurers active in all major (re)insurance hubs (including Europe). Therefore, equivalence for Bermuda under Solvency II (Equivalence) would have many benefits, including: Reinsurance: reinsurance contracts between EU insurers and Bermuda reinsurers will be treated in the same manner as reinsurance contracts entered into with EU reinsurers; Solvency: EU insurers with a Bermuda subsidiary will be able calculate group solvency may calculate the Bermuda subsidiary s solvency and capital requirements using Bermuda s solvency rules; and Supervision: EU Member States will recognise the Bermuda Monetary Authority as the group supervisor for Bermuda-based insurance groups that operate in the EU. Therefore, alone amongst the offshore jurisdictions, Bermuda sought Equivalence for its commercial insurance regime an undertaking that came to fruition on 24 March Bermuda s bifurcated regulatory regime It is important to note, however, that Equivalence is only in relation to Bermuda s groups and commercial (re)insurers (i.e., Classes 3A, 3B and 4 (re)insurers and Classes C, D and E (re)insurers). This is due to the fact that Bermuda s commercial (re)insurers have a significant presence in Europe and would have been disadvantaged if Bermuda had not obtained equivalence under Solvency II. However, Bermuda is also home to a significant captive industry, as well as being the jurisdiction of choice for a majority of the world s insurance-linked securities. As Bermuda s prudential framework for such limited purpose (re)insurers is fully aligned with the standards outlined by the International Association of Insurance Supervisors, Bermuda was able to bifurcate its regulatory regime so that the requirements of Solvency II did not extend to its limited purpose (re)insurers. As a result, Bermuda is in the unique position of being able to maintain a regulatory regime that is appropriate for both the commercial and limited purpose (re)insurance markets. Head Office Requirements v1 2 of 5

3 One requirement resulting from Equivalence was that Bermuda s commercial (re)insurers would be required to establish and maintain a head office in Bermuda. At first, there was some consternation among (re)insurers, who queried whether this requirement meant that they would need to move their offices and personnel to Bermuda. However, that is not the case. Instead, the (re)insurer need only demonstrate that it has a sufficient nexus with Bermuda. The following factors can be used in making such determination: where does the underwriting, risk management and operational decision-making of the (re)insurer occur; are senior executives responsible for and involved in the decision-making relating to the (re)insurer s business located in Bermuda; where do meetings of the (re)insurer s board of directors occur; the location where the (re)insurer s management meets to effect policy decisions; the residence of the (re)insurer s officers, insurance managers or employees; and the residence of one or more the (re)insurer s directors in Bermuda; and the nature, scale and complexity of the (re)insurer s business. Pro-business Immigration Laws If a (re)insurer decides to relocate any personnel to Bermuda, it is important to note that Bermuda has been proactive in recent years in making its immigration laws business friendly. In particular, Bermuda has the following types of new work permit: Global Work Permits: Global Work Permits are intended to allow persons who are employed by a global company in another jurisdiction to transfer to the Bermuda office without the need to advertise. A global company is any company in Bermuda that employs people in jurisdictions outside of Bermuda. Franchise businesses are not global employers for the purposes of this policy. The company must demonstrate that the applicant is not being transferred to fill a pre-existing position. The Global Work Permit is available for terms of one, two, three, four or five years. New Business Work Permits. A New Business Work Permit allows for companies that are new to Bermuda to receive automatic approval of work permits applied for within the first six months of operation. New Business Work Permits will be granted for terms of one, two, three, four or five years v1 3 of 5

4 Global Entrepreneur Work Permits. Global Entrepreneur Work Permits (GE Permits) are intended to assist persons planning to start a new business in Bermuda. GE Permits will be issued for a period of up to one year and allow the holder to work and reside in Bermuda. Work activities permitted under the GE Permit include business planning, seeking appropriate Government or regulatory approval(s), meeting compliance or financial requirements and raising capital. As a result of these changes, Bermuda has brought stability to its immigration laws a move which has encouraged the growth and development if its international business community. Bermuda as an NAIC-approved jurisdiction Bermuda was the very first offshore jurisdiction to be granted qualified jurisdiction status by the NAIC. As a result, Bermuda s reinsurers are eligible to be certified for reduced reinsurance collateral requirements in US jurisdictions that have adopted the revised Credit for Reinsurance Model Law and Regulations (which allow highly rated non-us reinsurers to reinsure US cedents and maintain reduced collateral requirements). A non-us reinsurer will only be certified if it is licensed and domiciled in a qualified jurisdiction. Therefore, Bermuda s designation as a qualified jurisdiction represents a significant benefit to Bermuda (re)insurers in the US insurance market, as it will mean less costs and greater efficiencies in conducting (re)insurance business across the insurance markets, while also emphasising US confidence in the Bermuda Monetary Authority as an insurance supervisor. Country-By-Country Reporting In addition to the changes to Bermuda s legal and regulatory framework, Bermuda is also at the forefront of the international movement towards greater cooperation and transparency. In April 2016, Bermuda signed its Declaration to the Multilateral Competent Authority Agreement for the exchange of Country by Country Reports (CBC). In doing so, Bermuda adopted the OECD's CBC reporting regime applicable to multinational enterprises. Bermuda's CBC Declaration will, from the 2016 fiscal year, instruct multinational enterprises headquartered in Bermuda to file their CBC information with the Minister of Finance by 31 December This start date is in line with France, the UK and a number of other countries, and is an extension of Bermuda s move in October 2014 to become an early adopter of the OECD's other automatic exchange of tax information regime: the common reporting standard. Through the CRS, Bermuda already requires financial institutions to file aspects of their clients financial information by 30 September v1 4 of 5

5 Bermuda was one of the first jurisdictions in the world to sign up as an early adopter of the CRS and, by signing-up to the CBC, demonstrates the jurisdiction s commitment to upholding international best practice in international transparency. Conclusion The use of offshore jurisdictions by international businesses has been much maligned in the current political climate. This is due, in part, to the perception that offshore jurisdictions allow business to be conducted in secrecy, hidden from the laws, regulations and oversight of onshore governments. As a result of this perception, it is inevitable, perhaps, that offshore jurisdictions will be expected to increase their levels of regulatory scrutiny and oversight. However, through the recognition granted to Bermuda by the EU and the US, as well as the developments that Bermuda has introduced through the CRS and the CBC, Bermuda s legal and regulatory regime has proven that it meets the highest standards expect by international businesses and onshore governments alike. Article Written by: Gavin Woods Appleby Counsel gwoods@applebyglobal.com v1 5 of 5