This guide provides the latest information on sources of insurance and reinsurance law, overseas-based insurers or reinsurers, making an insurance contract, intermediary involvement, alternative risk transfer (ART) transactions, warranties, conditions precedent, insurance disputes and insurtech.
1. BASIS OF INSURANCE AND REINSURANCE LAW
1.1 SOURCES OF INSURANCE AND REINSURANCE LAW
The principal legislation governing companies in Bermuda is the Companies Act 1981, as amended (the “Companies Act”), under which the majority of companies in Bermuda are incorporated by registration.
In addition to the Companies Act, (re)insurance companies and (re)insurance intermediaries in Bermuda are also governed by the provisions of the Insurance Act 1978 and related regulations, rules and guidance notes, each as amended from time to time (the “Insurance Act”), which applies to any person carrying on insurance business in or from within Bermuda. “Insurance business”, which includes that of reinsurance, is the business of effecting and carrying out contracts to:
- protect persons against loss or liability to loss in respect of risks to which they may be exposed; or
- pay a sum of money or render money’s worth on the occurrence of a loss event.
Insurers in Bermuda should also be aware of the provisions of the Life Insurance Act 1978 (the “Life Act”), the Segregated Accounts Companies Act 2000 (the “SAC Act”), the Incorporated Segregated Accounts Companies Act 2019 (the “ISAC Act”) and the Non-Resident Insurance Undertakings Act 1967 (each as amended), as applicable.
2. REGULATION OF INSURANCE AND REINSURANCE
2.1 INSURANCE AND REINSURANCE REGULATORY BODIES AND LEGISLATIVE GUIDANCE
Bermuda’s Insurance Regulator
The Supervision (Insurance) Department of the Bermuda Monetary Authority (BMA) is responsible for the supervision, regulation and inspection of Bermuda’s insurance companies and for the licensing of all insurance companies, brokers, agents and managers. The Insurance Act provides the Supervision (Insurance) Department, also referred to as the “Authority” or BMA, with substantive licensing, supervision and intervention powers. According to the Authority, it always seeks to act in the best interests of both current and prospective policyholders while facilitating the continued development of a viable, healthy competitive and innovative insurance industry. The Authority has a risk-based supervisory process, which categorises regulated entities according to a number of parameters within each class of insurance.
Key elements of the Authority’s supervisory regime include:
- scrutinising statutory financial returns quarterly and annually;
- meeting with senior management as needed;
- performing on-site visits and inspections; and
- periodically hosting or participating in supervisory colleges.
The Authority works to provide supervision that reflects the nature, scale and complexity of registrants in accordance with the proportionality principle. The Authority is a charter member of the International Association of Insurance Supervisors and is routinely involved in the development of guidelines for global insurance regulation.
As stated by the Authority, its risk-based supervisory approach involves the application of appropriate supervisory intensity to key areas of risk, including where material amounts of business are transacted with unrelated parties. Reliance is placed on transparency and ongoing disclosures where counterparties are deemed to be sophisticated and capable of understanding the risks underlying their business and determining their degree of tolerance for those risks.
Commercial insurers are required to demonstrate capital adequacy with respect to the Bermuda Solvency Capital Ratio (BSCR) which is computed per the BMA’s standard capital model or an approved capital model approved by the BMA. The BSCR is a risk-based capital model which takes into account the risk characteristics of different aspects of the insurer’s business.
The BMA introduced prudential standards in relation to all commercial (re)insurers’ enhanced capital requirements (ECRs). The ECR is equal to the higher capital and surplus requirement of the BSCR or that company’s approved internal model. To enable the BMA to better assess the quality of the commercial (re)insurer’s capital resources, applicable (re)insurers are required to disclose the make-up of their capital in accordance with the “three-tiered capital system”. In order to minimise the risk of a shortfall in capital arising from an unexpected deviation or adverse event, the BMA expects such insurers to operate at or above a target capital level, which exceeds an insurer’s ECR. Additionally, the BMA expects these insurers to maintain available statutory capital and surplus of an amount that is equal to or exceeds the value of its ECR in accordance with the thresholds of Tier 1, 2 or 3 capital which should not be more (or less) than a percentage value of the insurer’s ECR.
Under this system, all of the (re)insurer’s capital instruments will be classified as either basic or ancillary capital, which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics.
Highest quality capital will be classified as Tier 1 capital and lesser quality capital will be classified as either Tier 2 capital or Tier 3 capital. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3, capital may be used to support the insurer’s solvency margins and ECR.
While not specifically referred to in the Insurance Act, the BMA has also established a target capital level (TCL) equal to 120% of its ECR. While an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA. Failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight. Recently, the BMA has required target capital levels of 140% or 150% of the ECR for new registrants, depending on the business being written.
Any (re)insurer that fails to comply with its ECR must, at the point that the directors become aware of such failure or have reason to believe that such failure has occurred, immediately notify the BMA and then, within 14 days, file a written report containing the particular circumstances that led to the failure, and outlining their plan (including actions to be taken and an indicative timeline) on how they intend to rectify the failure.
Additionally, and subject to any legislation to the contrary, any insurer that fails to comply with their ECR is prohibited from declaring and paying dividends until the failure has been rectified with the BMA.
Categories and Classes of Insurers
The Insurance Act distinguishes between insurers that carry on the following activities.
- Long-term business, which consists of insurance contracts covering life, annuity, accident and disability risks and certain other types of contract. This does not include “excepted long-term business” (as defined in the Insurance Act).
- Insurers carrying on general business – that is, any insurance business that is not long term or special purpose. General business includes accident and disability policies that have been in effect for less than five years.
- Insurers carrying on special-purpose business, including that under which an insurer fully funds its liabilities to its insureds through the proceeds of a debt issuance, cash, time deposits or other financing mechanism.
There are eight general business classifications (Classes 1, 2, 3, 3A, 3B, 4, IGB and IIGB), six long-term business classifications (Classes A, B, C, D, E and ILT) and three classifications of restricted special-purpose insurer, unrestricted special-purpose insurer and the collateralised insurer (SPIs), which can be classified as either general business or long-term business.
Insurers are sub-divided into three categories:
- captive insurers (Classes 1, 2, 3, A and B) (“Captive Insurers”);
- commercial insurers (Classes 3A, 3B, 4, C, D and E) (“Commercial Insurers”); and
- special-purpose and collateralised insurers.
The IGB, IIGB and ILT categories can be either captive or commercial insurers.
General Business Class Requirements
A Class 1 insurer is:
- wholly owned by one person and intends to carry on insurance business consisting only of insuring the risks of that person; or
- an affiliate of a group that intends to carry on insurance business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders.
A Class 2 insurer is wholly owned by two or more unrelated persons and intends to carry on insurance business in respect of which not less than 80% of the net premiums written will be written for the purpose of either of the following:
- insuring the risks of any of those persons or of any affiliates of any of those persons; or
- insuring the risks which, in the BMA’s opinion, arise out of the business or operations of those persons or any affiliates of any of those persons, and that would be registrable as a Class 1 insurer, but for the fact that:
- not all of the business which it intends to carry on, but at least 80% of the net premiums written, will consist of the business described under the requirements for a Class 1 insurer; or
- it intends to carry on insurance business in respect of which not less than 80% of the net premiums written will, in the BMA’s opinion, arise out of the business or operations of the person by whom it is owned or any of the affiliates of that person.
A Class 3 insurer is not registrable as a Class 1, Class 2, Class 3A, Class 3B, Class 4 insurer or special-purpose insurer.
A Class 3A insurer intends to carry on insurance business in circumstances where:
- 50% or more of the net premiums written, or 50% or more of the loss and loss expense provisions, represent unrelated business; and
- the total net premiums written from unrelated business are less than BMD50 million.
A Class 3B insurer intends to carry on insurance business in circumstances where:
- 50% or more of the net premiums written, or 50% or more of the loss and loss expense provisions, represent unrelated business; and
- the total net premiums written from unrelated business are BMD50 million or more.
A Class 4 insurer:
- has total statutory capital and surplus of not less than BMD100 million; and
- intends to carry on insurance business including excess liability business or property catastrophe reinsurance business.
A Class IGB insurer intends, at the time of its registration, to carry on general business in an innovative and experimental manner, whereas a Class IIGB insurer intends to carry on business in an innovative manner.
Long-Term Business Class Requirements
A Class A insurer is:
- wholly owned by one person and intends to carry on long-term business consisting only of insuring the risks of that person; or
- an affiliate of a group that intends to carry on long-term business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders.
A Class B insurer is wholly owned by two or more unrelated persons and intends to carry on long-term business in respect of which not less than 80% of the premiums and other consideration will be written for the purpose of one of the following:
- insuring the risks of any of those persons or of any affiliates of any of those persons; or
- insuring risks which, in the BMA’s opinion, arise out of the business or operations of those persons or any affiliates of any of those persons, and that would be registrable as a Class A insurer, but for the fact that:
- not all of the business which it intends to carry on, but at least 80% of the premiums and other considerations written, will consist of the long-term business described under the requirements for a Class A insurer; or
- it intends to carry on long-term business in respect of which not less than 80% of the premiums and other considerations written will, in the BMA’s opinion, arise out of the business or operations of the person by whom it is owned or any of the affiliates of that person.
A Class C insurer has total assets of less than BMD250 million and is not registrable as a Class A or Class B insurer.
A Class D insurer has total assets of BMD250 million or more, but less than BMD500 million, and is not registrable as a Class A, Class B or Class C insurer.
A Class E insurer has total assets of more than BMD500 million and is not registrable as a Class A or Class B insurer.
A Class ILT insurer intends at the time of its application for registration to carry on long-term business in an innovative and experimental manner.
Special-Purpose/Collateralised Insurers
A special-purpose insurer is an insurer that carries on special-purpose business. “Special-purpose business” means insurance business under which an insurer fully collateralises its liabilities to the persons insured through the proceeds of any one or more of the following:
- a debt issuance where the repayment rights of the providers of such debt are subordinated to the rights of the person insured;
- some other financing mechanism approved by the BMA;
- cash; and
- time deposits.
Restricted special-purpose business means special-purpose business conducted between a special-purpose insurer and specific insureds approved by the BMA.
A collateralised insurer is an insurer that carries on special-purpose business but is not a special-purpose insurer. Collateralised insurers allow for a more flexible approach to collateral, cedant and product than is permitted for special-purpose insurers:
- cedants may be unaffiliated unrated entities;
- collateral may be a combination of cash and contingent collateral;
- a wider range of eligible investments is permitted as collateral; and
- claw-back of collateral is permissible.
Requirements for Registration
Insurers must meet the “minimum criteria” for registration as follows:
- officers and controllers must meet a fitness and propriety test;
- suitable corporate governance policies and processes must be established according to the nature, risk profile, size and complexity of the insurer;
- a minimum of two individuals must effectively direct the business of the insurer;
- there must be a suitable number of non-executive directors on the board of directors of the insurer;
- business must be conducted in a prudent manner;
- the position of the insurer within the structure of any group to which it belongs must not obstruct effective consolidated supervision; and
- the business of the insurer must be carried on with integrity and the professional skills appropriate to the nature and scale of the insurer’s activities.
An insurer must also meet minimum margins of solvency. For a general insurer this is calculated by reference to the greater of net premiums and discounted loss reserves and other insurance reserves. A minimum floor of BMD120,000 applies for single-parent captives and BMD100 million for Class 4 reinsurers. The minimum margin of solvency for long-term insurers is a proportion of assets reported on the insurer’s statutory balance sheet, subject to a minimum floor of BMD120,000 for single-parent captives and BMD8 million for Class E insurers (or 2% of the first BMD500 million of assets plus 1.5% of assets above USD500 million, whichever is greater; here BMD=USD).
Conduct of Insurers
All insurers must comply with the BMA’s Insurance Code of Conduct (the “Code”), setting out the duties, requirements and standards with which insurers are to comply when conducting business. The Code requires insurers to establish and maintain a sound corporate governance framework, providing for appropriate oversight of the insurer’s business and outsourcing, effective risk management and an internal controls framework that has regard for international best practice on risk management and internal controls, in order to adequately protect policyholder interests.
The ultimate responsibility for sound and prudent governance and oversight of the insurer rests with its board of directors (the “Board”). In this regard, the Board is responsible for ensuring corporate governance policies and practices are developed and applied in a prudent manner that promotes the Board’s efficient, objective and independent judgment and decision-making.
The Board must also have adequate powers and resources to discharge its duties fully and effectively. Adequate resources, such as sufficient funding, staff and facilities, should be allocated to the Board to enable the board members to carry out their respective roles and responsibilities efficiently and effectively. In addition, the Board should have access to the services of external consultants or specialists where necessary or appropriate, subject to criteria (such as independence) and due procedures for the appointment and dismissal of such consultants or specialists.
For an insurer that is registered in Bermuda, the Board should have independent non-executive directors (ie, directors who are free from any business or other association, including those arising out of current beneficial ownership, existing or past involvement in management of the insurer or as a customer, supplier or adviser that could materially interfere with the exercise of independent judgement in the best interests of the insurer and its policyholders).
Individual members of the Board must:
- act in good faith, honestly and reasonably;
- exercise due care and diligence;
- act in the best interests of the insurer and policyholders;
- exercise independent judgement and objectivity in their decision-making; and
- ensure appropriate policies and procedures exist to deal with conflicts of interest effectively.
As there are varying risk profiles of insurers, the BMA interprets the Code based on the nature, scale and complexity of the business of each insurer.
The Board and the chief and senior executives should adopt an effective risk management and internal controls framework. The framework should have regard for international best practices on risk management and internal controls. This includes ensuring the fitness and propriety of individuals responsible for the management and oversight of the insurer’s risk management framework. The risk management framework should be embedded in both the organisational structure and strategic oversight process supported by appropriate controls, policies and procedures. The material risks to be addressed by the risk management framework include the:
- insurance underwriting risk;
- investment, liquidity and concentration risk;
- market risk;
- credit risk;
- systems, cyber and operations risk (operational risk);
- group risk;
- strategic risk including emerging risk;
- systemic and reputational risk;
- legal/litigation risk; and
- ESG risk.
The “prudent person” principle requires that an individual entrusted with the management of a client’s funds may only invest in instruments that any reasonable individual with objectives of capital preservation and return on investment would own. In relation to the insurer, this principle requires that the insurer, in determining the appropriate investment strategy and policy, may only assume investment risks that it can properly identify, measure, respond to, monitor, control, and report while taking into consideration its capital requirements and adequacy, short-term and long-term liquidity requirements, and policyholder obligations. Furthermore, the insurer must ensure that investment decisions have been executed in the best interest of its policyholders.
Insurers must comply with the the Insurance Sector Operational Cyber-Risk Management Code of Conduct (the “Cyber Code”). The Cyber Code applies to all insurers, insurance managers and insurance intermediaries (agents, brokers and insurance marketplace providers – “Registrants”). The Cyber Code establishes duties, requirements, standards, procedures and principles to be complied with in relation to operational cyber-risk management. The BMA expects that cyber-risk controls will be proportional to the nature, scale and complexity of the organisation.
The BMA also requires that insurers appoint a Chief Information Security Officer (“CISO”). The role of CISO must be allocated appropriately to a qualified member of staff or to an outsourced resource. The role of the CISO is to implement and monitor the operational cyber-risk management programme. The CISO role is expected to be of sufficient seniority to facilitate the effective delivery of the operational cyber-risk management programme.
Principal Representative
Every insurance company registered in Bermuda, even those with no physical presence on the island, must appoint a principal representative. A principal representative can take the form of a natural person or body corporate, but is more often a body corporate. The insurance manager of an insurer commonly also acts as the insurer’s principal representative, but it is possible for both roles to be fulfilled by two separate entities. The BMA must approve the appointment of a principal representative by an insurer.
The principal representative exists so that the BMA can have some identified individual or company present in Bermuda to whom it can look in respect of an insurer’s affairs. The principal representative has specific statutory obligations including the requirement to report certain events to the BMA, breach of which constitutes an offence under the Insurance Act. In particular, the principal representative must report the insolvency or likely insolvency of the insurer, the breach by the insurer of any law or the insurer’s licence, the breach of any condition or solvency margin of the insurer, or the failure by the insurer to adhere to certain other directions of the BMA.
Auditor
Subject to any directions given by the BMA to the contrary, every insurer must appoint and maintain an auditor approved by the BMA. Insurers must have their statutory financial returns audited annually by an approved auditor. Under prevailing policy, the BMA will only appoint individuals or firms that are resident in Bermuda as approved auditors.
Loss-Reserve Specialist
For general insurers, the Insurance Act stipulates that in certain instances a loss-reserve specialist (LRS), approved by the BMA, must opine on their loss reserves. The LRS is usually an actuary but must be independent from the actuary who sets the reserve levels (see below). This opinion gives the BMA additional assurance concerning the level of reserves carried by the insurer.
Actuary
Insurers registered as long-term insurers must appoint an actuary in accordance with the Act, and have this appointment approved by the BMA. The primary role of the approved actuary is to opine on the adequacy of the total long-term business insurance reserves, reflected in insurers’ statutory financial statements and statutory financial returns, and any other matters specified by the BMA.
Insurance Intermediaries
Insurance intermediaries, including insurance managers, brokers, agents or insurance marketplace providers, or their innovative counterparts – IA, IB, IM or IMPs (collectively, “insurance intermediaries”) – must comply with the respective BMA Insurance Brokers and Insurance Agents Code of Conduct (the “Intermediary Code”). Insurance intermediaries can be either a natural person or a body corporate. The insurance intermediary must also meet the minimum criteria for registration. These include the fitness and propriety of controllers, which is assessed by reference to the competence, capability, honesty, integrity and reputation of the officer controllers.
The Intermediary Code sets out the principles that must be adhered to by insurance intermediaries, including the need for business to be conducted in a prudent manner, client relationships, disclosure, complaint handling, business continuity and disaster recovery, conflicts of interest, fraud, client due diligence, outsourcing and co-operation with the BMA.
Insurance intermediaries must maintain adequate professional indemnity insurance but are not otherwise subject to any prudential requirements.
2.2 THE WRITING OF INSURANCE AND REINSURANCE
See 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance.
2.3 THE TAXATION OF PREMIUM
There is no taxation on premiums in Bermuda at the present time.
3. OVERSEAS FIRMS DOING BUSINESS IN THE JURISDICTION
3.1 OVERSEAS-BASED INSURERS OR REINSURERS
The Insurance Act prohibits the conduct of insurance business in or from within Bermuda unless the person carrying out such activities is registered under the Insurance Act. It may be possible for an overseas carrier to structure its activities in such a way that it is deemed not to be conducting insurance business in or from within Bermuda, in which case it would not need to be registered under the Insurance Act.
Where insurance business is conducted in or from within Bermuda, then the carrier must be registered under the Insurance Act and must comply with the Bermuda insurance regulatory regime, including establishing and maintaining a head office and satisfying the applicable economic substance requirements.
Overseas carriers may apply for a permit to conduct business in Bermuda under the Companies Act. Such carriers would also have to apply for registration under the Insurance Act in order to conduct insurance business in or from within Bermuda, and would be subject to the Bermuda regulatory regime.
There are a few representatives of overseas carriers in Bermuda, commonly referred to as “non-resident insurance undertakings” (NRIUs). Most NRIUs engage agents in Bermuda who receive commissions on premiums written. Most of these premiums arise from the sale of life insurance policies.
3.2 FRONTING
Fronting is permitted in Bermuda.
4. TRANSACTION ACTIVITY
4.1 M&A ACTIVITIES RELATING TO INSURANCE COMPANIES
Where M&A transactions relating to insurance companies are undertaken, a BMA “no objection” or some form of notification will also be required, as the BMA must be informed of all the controllers of all registered insurers in Bermuda and any material changes to such controllers, and material changes to the business and operations of the insurer.
A “controller” for this purpose means:
- the managing director of the registered insurer or its parent company;
- the chief executive of the registered insurer or of its parent company;
- a 10%, 20%, 33% or 50% “shareholder controller”; or
- any person in accordance with whose directions or instructions the directors of the registered insurer or of its parent company are accustomed to act.
The definition of shareholder controller is set out in the Insurance Act, but generally refers to:
- a person who holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or its parent company;
- a person who is entitled to exercise 10% or more of the voting power at any shareholders’ meeting of such registered insurer or its parent company; or
- a person who is able to exercise significant influence over the management of the registered insurer or its parent company by virtue of its shareholding or its entitlement to exercise, or control the exercise of, its voting power at any shareholders’ meeting.
A material change to an insurers’ business and operations must receive the prior “no objection” of the BMA in the event that any one of the following occurs:
- the acquisition or transfer of insurance business being part of a scheme falling within, or any transaction relating to a scheme of arrangement under, Section 25 of the Insurance Act or Section 99 of the Companies Act;
- an amalgamation with or acquisition of another firm;
- engagement in unrelated business that is retail business;
- the acquisition of a controlling interest in an undertaking that is engaged in non-insurance business which offers services and products to persons who are not affiliates of the insurer;
- outsourcing of all or substantially all of an insurer’s actuarial, risk management, compliance or internal audit functions;
- outsourcing of all or a material part of an insurer’s underwriting activity;
- the transfer other than by way of reinsurance of all or substantially all of a line of business;
- the expansion into a material new line of business;
- the sale of an insurer; and
- the outsourcing of an officer role.
In considering whether to provide “no objection” the BMA will, among other things, assess the fitness and propriety of a proposed controller and will assess the financial strength of the insurance company and its ability to continue to meet its capital and solvency margins following the transaction.
Changes to the direct or ultimate beneficial ownership may also give rise to filing requirements under the Exchange Control Act 1972 and related regulations, which are made via the BMA’s filing portal.
Closed Block Business
In Bermuda’s insurance landscape, closed block transactions play a pivotal role, particularly in long-term reinsurance. The BMA exercises meticulous oversight of these transactions, guided by a risk-based and proportional supervisory framework. Each transaction is subject to prior BMA approval, with the review process tailored to its unique attributes. The complexity, size, and risk profile impact of a transaction directly influence the depth of regulatory scrutiny. This individualised approach ensures thorough regulatory engagement, aligned with the specific demands of each transaction. The BMA’s method not only underscores the importance of these transactions in the insurance market but also reinforces the commitment to maintaining a robust and responsive regulatory environment. This approach has significant implications for insurers, affecting their risk management, capital requirements, and compliance strategies.
Related Party Transactions
The BMA requires prior approval for all assets and investments involving counterparty credit exposure to affiliated, related or connected parties. This oversight is part of the BMA’s proactive and robust regulatory approach, aligned with international standards to ensure market integrity and policyholder protection. The BMA’s vigilant monitoring of these transactions emphasises transparency and accountability, employing advanced analytical tools and comprehensive reporting mechanisms. This not only aligns with global regulatory practices but also positively influences the stability and reliability of Bermuda’s insurance sector, enhancing its international reputation and trust among stakeholders.
5. DISTRIBUTION
5.1 DISTRIBUTION OF INSURANCE AND REINSURANCE PRODUCTS
Distribution of domestic insurance products in Bermuda is undertaken direct by insurers or via insurance intermediaries, such as brokers or agents.
6. MAKING AN INSURANCE CONTRACT
6.1 OBLIGATIONS OF THE INSURED AND INSURER
The obligations of the insured and insurer will be governed by the contract entered into between the parties. Generally, the duty of the insured is to disclose material facts that a prudent insurer would take into account when reaching the decision of whether or not to accept the insurance risk.
6.2 FAILURE TO COMPLY WITH OBLIGATIONS OF AN INSURANCE CONTRACT
Under the Insurance Act, the BMA has powers of intervention and direction in circumstances where the insurer is failing or there is reason to believe the insurer is failing in complying with its statutory obligations under the Insurance Act. The penalties on failure to comply with the obligations as detailed between the insurer and the insured in the insurance contract are subject to the provisions of the contract, in addition to any penalties implemented subject to any dispute resolution the parties undertake.
Consequences of the Insured’s Fraudulence
If the insured fraudulently provides incorrect information or fails to disclose facts of importance during the negotiation of the insurance contract, the contract is not binding upon the insurance company and will be deemed null and void.
Consequences of the Insured’s Negligence
If the insured provides incorrect information or fails to disclose facts of importance by negligence, the insurance company will only be liable on a pro rata basis calculated based on the premium. The insurer must document what premium they would have claimed had the correct facts been known and the insurance claim is calculated on this basis.
Would the insurer presumably not have offered insurance to the insured had the correct information been disclosed, the insurer is exempt from liability.
If the insured did not know or could not have been expected to know that the information provided by them was incorrect, the insurer is liable to the same extent as they would have been had no incorrect information been given.
6.3 INTERMEDIARY INVOLVEMENT IN AN INSURANCE CONTRACT
Insurance managers, brokers, agents or insurance marketplace providers are all intermediaries in Bermuda. These range from individuals to large firms.
Intermediaries are third parties that facilitate the placement and purchase of insurance, and provide services to insurance companies and their consumers that complement the insurance placement process, that is:
- taking account of the interests of the customer;
- only recommending insurance solutions that are appropriate for the customer; and
- providing the customer with information regarding the distributed insurance product as well as the intermediary’s business and the way in which the intermediary is remunerated.
6.4 LEGAL REQUIREMENTS AND DISTINGUISHING FEATURES OF AN INSURANCE CONTRACT
There is no statutory definition under the Insurance Act of an insurance contract under Bermuda law, and no explicit legal requirements that must be fulfilled for a contract to constitute an insurance contract.
6.5 MULTIPLE INSURED OR POTENTIAL BENEFICIARIES
A third party may enforce a term of an insurance or reinsurance contract governed by Bermuda law in its own right if:
- the third party is expressly identified in the contract by name, as a member of a class or as answering a particular description, which includes a person nominated or otherwise identified pursuant to the terms of the contract (the third party need not have been in existence when the contract was entered into); and
- the contract expressly provides in writing that the third party may enforce a term.
6.6 CONSUMER CONTRACTS OR REINSURANCE CONTRACTS
This does not differentiate from 6.4 Legal Requirements and Distinguishing Features of an Insurance Contract. With no statutory definition of an “insurance contract”, both consumer and reinsurance contracts encompass the same base elements of offer, acceptance, consideration and intention to create legal relations.
7. ALTERNATIVE RISK TRANSFER (ART)
7.1 ART TRANSACTIONS
Bermuda is the world’s leading domicile for insurance-linked securities (ILS) transactions. With a highly regarded regulatory framework, sophisticated legal system, developed infrastructure and global companies with a physical presence, Bermuda maintains a reputation as a quality jurisdiction that has demonstrated its ability to respond to changes in market conditions while meeting its clients’ commercial needs.
The BMD100 billion ILS market has proved to be both relevant and reliable after the heavy catastrophe losses around the world in 2017 and 2018. As of November 2023, the BMA revealed that there had been 55 new insurer registrations and four new intermediary registrations. Bermuda’s (re)insurance market is comprised of over 1,200 (re)insurers holding total assets in excess of USD980 billion and writing a gross premium of approximately USD240 billion.
As of 31 December 2021, Bermuda maintained its position as the premier jurisdiction for captives, with gross premiums of approximately BMD24 billion. At the end of 2022, the Bermuda Stock Exchange (BSX) retained its position as the global leader in the listing of ILS, pushing it towards a record number of securities listed at year end. While due to a downturn in market activity in 2023 the number of new ILS listings fell, the overall nominal value of ILS-listed securities rose to BMD52.03 billion.
Bermuda has been in the ILS market for more than 20 years and was involved in some of the first deals in the mid-1990s. The influx of capital has been the main catalyst for the growth of the ILS market. Many investors are now developing their own modelling and due diligence capabilities, and cedants are now sponsoring deals as a way of securing more competitive prices.
Some ILS Structures
Some of the more common ILS structures in today’s market are as follows.
Catastrophe bonds
These bonds are capital market alternatives to traditional catastrophe reinsurance. Initially targeting high-risk appetites with high yields and covering single perils, modern catastrophe bonds now often cover multiple perils. They are typically structured as low-risk/investment-grade offerings, backed by over-collateralisation or third-party insurer guarantees.
Reinsurance sidecars
These fully collateralised entities – traditionally joint ventures between insurance/reinsurance companies – are increasingly deployed as vehicles for third-party capital in reinsurance underwriting. Life reinsurance sidecars, in particular, can utilise Class E insurers, providing a broader and more flexible approach than previously recognised, and contingent capital structures provide insurers with capital during defined periods following specific qualifying events. They are a practical solution in scenarios where insurance for low-probability, high-severity events is scarce.
Extreme mortality bonds
Issued to protect against significant deviations in mortality rates, these bonds are triggered due to events like pandemics, wars, or natural disasters, and are structured similarly to other asset-backed securities.
Longevity swaps
These transfer the risk of pension scheme members living longer than expected, from pension schemes to insurers or banks. They are crucial for defined benefit schemes, mitigating longevity risk and serving as a stepping stone towards pension risk transfer. The market for longevity swaps is expanding and adapting to meet diverse scheme requirements.
Industry loss warranties
These reinsurance contracts are triggered based on predetermined industry loss estimates from specified events, functioning like swap contracts.
Transformers
A transformer (usually a special purpose vehicle registered as a Class 3 insurer, collateralised insurer or SPI) converts risk under a (re)insurance contract into a form suitable for the capital markets, such as in credit derivatives (or vice versa).
7.2 FOREIGN ART TRANSACTIONS
See 7.1 ART Transactions.
8. INTERPRETING AN INSURANCE CONTRACT
8.1 INTERPRETATION OF INSURANCE CONTRACTS AND USE OF EXTRANEOUS EVIDENCE
This does not apply in this jurisdiction.
8.2 WARRANTIES
This does not apply in this jurisdiction.
8.3 CONDITIONS PRECEDENT
This does not apply in this jurisdiction.
9. INSURANCE DISPUTES
9.1 INSURANCE DISPUTES OVER COVERAGE
The regime under the SAC Act has received its first comprehensive review. In August 2023, Chief Justice Hargun delivered a judgment upholding the integrity of the statutory regime governing the creation and operation of SAC in Bermuda. This court case marks the first challenge to the principles of SAC and further solidifies their legitimacy as a vehicle fit to provide a separation of assets from a general account.
Many Bermuda law-governed insurance contracts contain arbitration clauses, which make disputes between the parties subject to arbitration and as a result they are not publicised. This is not always the case, however.
9.2 INSURANCE DISPUTES OVER JURISDICTION AND CHOICE OF LAW
In most commercial contracts (including insurance contracts) a clause is included regarding choice of law and jurisdiction for disputes in relation to the contract. The inclusion of this provision allows the parties to agree in writing upon a choice of forum for hearing disputes.
9.3 LITIGATION PROCESS
Where the contract states that Bermuda law will be the governing law, then any disputes regarding the contract will be heard in Bermuda. Commercial disputes within Bermuda are heard by the Supreme Court Commercial Division, for which the rules and litigation process are governed by the Supreme Court 1985. As in many jurisdictions, parties are encouraged to reach a settlement among themselves, to the best of their ability, prior to commencing legal proceedings. Where this cannot be achieved, litigation can be commenced by writ, originating summons, an originating motion or petition. The initiating party will be responsible for service on the opposing party. Following the originating summons to commence proceedings, the process will move through the steps of interim applications, discovery, trial and hearing, and close with the judgment. Parties to an action in the Supreme Court can appeal a judgment, with the appeal being heard in the Court of Appeal.
9.4 THE ENFORCEMENT OF JUDGMENTS
Two categories of rules apply in relation to enforcement of foreign judgements. Firstly, the statutory rules under the Judgements (Reciprocal Enforcement) Act 1958, which apply to judgments of courts in the UK and certain Commonwealth countries and overseas territories. Under this Act, foreign judgments registered by a jurisdiction that also recognises the Act will be enforced. Secondly, in Bermuda, there are common law rules that are applicable to judgments of courts in the rest of the world, particularly the United States.
9.5 THE ENFORCEMENT OF ARBITRATION CLAUSES
Arbitration clauses are common within the commercial contracts in Bermuda. Where arbitration clauses are included in insurance contracts, they tend to limit the handling of any disputes strictly to arbitration. Generally, where a contract contains an arbitration clause as the means of handling disputes, this will be upheld.
9.6 THE ENFORCEMENT OF AWARDS
See 9.4 The Enforcement of Judgments.
9.7 ALTERNATIVE DISPUTE RESOLUTION
Dispute resolution is still predominantly litigation-focused in Bermuda; however, there has been an increase in the use of arbitration clauses in Bermuda law-governed agreements and increased activity within the Bermuda Branch of the Chartered Institute of Arbitrators. Many companies recognise and appreciate the merits of arbitration as a cost-effective and potentially quicker method of resolving disputes. Further to this, many companies value keeping their disputes confidential which can be achieved through arbitration, but not through the courts.
9.8 PENALTIES FOR LATE PAYMENT OF CLAIMS
Specific penalties in regard to late payment of claims would be subject to the provisions of the insurance contract between the insurer and the insured. However, under the Insurance Act 1978, the BMA has powers of intervention and direction in circumstances where it is believed that the insurer is at significant risk of being unable, or is unable, to meet its obligations to policyholders.
9.9 INSURERS’ RIGHTS OF SUBROGATION
Bermuda law recognises an insurer’s rights to subrogation against third parties who have caused loss to the insured. These rights can be enacted provided the insurer has discharged its liability under the policy.
10. INSURTECH
10.1 INSURTECH DEVELOPMENTS
Insurtech is the insurance industry’s next evolution and, given that Bermuda has been at the forefront of providing innovative solutions in the insurance industry for decades, it is a natural progression for the jurisdiction.
The BMA has taken a proactive response to the growing insurtech market, anticipating the needs of current and future players.
Leveraging Bermuda’s reputation as a centre of excellence for innovation in a sound regulatory environment, the BMA has launched two parallel innovation tracks initially targeted at the insurtech market:
- the insurance regulatory sandbox (the “Sandbox”); and
- an innovation hub (the “Innovation Hub”).
The BMA has endeavoured to provide innovative solutions in the insurance industry to maintain Bermuda’s dominance in the global ILS and captive sectors.
The Insurance Regulatory Sandbox
The Sandbox is a space where companies can test new technologies and offer innovative products and services to a limited number of customers in a controlled environment and for a limited period of time.
The Sandbox is available for entities registered, or proposing to become registered, as an insurer or insurance intermediary under the Insurance Act. The BMA encourages the use of a separately incorporated company (subsidiary or joint venture) to carry out activities within the Sandbox.
The licences available are: an ILT for a long-term insurer, an IGB for a general business insurer, an IM for an insurance manager, an IA for an agent, and an IB for a broker. On successful graduation from the Sandbox, the company will be relicensed under an existing class of insurer or insurance intermediary (See 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance).
Innovation Hub
The Innovation Hub is a platform for exchanging ideas and information and for facilitating dialogue between the BMA and market participants. The space is designed for activities not directly regulated by the BMA and is ideal for a company still developing its thoughts and ideas, not yet prepared for proof of concept, and therefore not ready to apply for entry into the Sandbox. There is a dedicated working group for the insurance sector called the BMA Insurance Innovation Working Group.
10.2 REGULATORY RESPONSE
See 10.1 Insurtech Developments.
11. EMERGING RISKS AND NEW PRODUCTS
11.1 EMERGING RISKS AFFECTING THE INSURANCE MARKET
This does not apply in this jurisdiction.
11.2 NEW PRODUCTS OR ALTERNATIVE SOLUTIONS
This does not apply in this jurisdiction.
12. DEVELOPMENTS IN INSURANCE LAW
12.1 SIGNIFICANT LEGISLATIVE OR REGULATORY DEVELOPMENTS
The developments below reflect the BMA’s ongoing efforts to refine and enhance its regulatory regime. Most of the changes below are aimed at ensuring Bermuda’s solvency regime remains closely aligned with international standards like the Solvency II framework. Some of these changes, effective from March 2024, are anticipated to impact insurers’ solvency positions and market dynamics.
Standard Approach and Scenario-Based Approach
The BMA’s standard approach is underpinned as a risk-based framework, focusing on risk identification, assessment, prioritisation, resource allocation, and response. This approach encompasses a multi-phase risk-based programme including planning, risk impact grouping, monitoring, and supervisory actions.
The standard go-to approach to regulation over the insurance sector has proved to be effective in ensuring that insurers carefully assess their risk and provide protection to policyholders. However, Bermuda has a number of long-term insurers with a significant number of highly bespoke reinsurance structures and asset portfolios. For these long-term insurers, the standard approach may be too blunt an instrument to effectively capture the market sensitivity of their business, and so the BMA is refining a scenario-based approached (SBA). This SBA aims to capture market sensitivity, interest rate sensitivity, and the degree of cash-flow matching between assets and liabilities.
Changes to the BSCR Formula, Lapse Risk, BEL
The BMA has proposed amendments to enhance the regulatory regime, particularly focusing on lapse risk and best estimate liability (BEL) within the Bermuda Solvency Capital Requirement (BSCR) framework. The goal is to increase risk sensitivity and improve capital requirement accuracy.
Group Risk Margin
The BMA utilises the cost of capital method for calculating the group risk margin. This tool forms part of the regulatory framework, reflecting the compensation needed by an insurer to bear specific risks.
Climate Change Disclosure Requirements
The BMA has been examining the impact of climate change in the Bermuda insurance industry, with the aim of appropriately integrating climate and wider environmental, social and governance risks into its regulatory framework. The BMA has been conducting surveys and gathering feedback as groundwork and in anticipation of guidance and requirements that will follow in the form of legislation or rules published by the BMA applicable to insurers. This development is significant given the social climate with regards to global climate change and risk, while also proving Bermuda’s commitment to and rigid stance in the regulation of the insurance sector, adding to its status as a premier insurance and reinsurance jurisdiction.
Recovery and Resolution Plans
In 2022 the BMA released a consultation paper on the proposed introduction of and approach to a recovery planning regime for the insurance sector. The proposed regime comes on the back of previous global financial crises where the Financial Stability Board (FSB) set out new standards applicable to systemically important financial institutions. The regime is proposed with the intention of aiding the insurer in understanding its own risk in severe stress scenarios and helping to strengthen Bermuda’s regulatory framework by ensuring insurers have a plan to act in an orderly and timely manner should they find themselves under severe stress.
The BMA will use a defined set of criteria as a guide to which insurers will be required to have a recovery plan in place, subject to appropriate proportionality and risk analysis.
The BMA will be drafting the recovery planning rules in the near future.
Originally Published in Chambers Insurance & Reinsurance Guide 2024: Bermuda
For further information, please contact:
Brad Adderley, Partner, Appleby
badderley@applebyglobal.com
