Bermuda Focus

The use of Bermuda vehicles in Asia

Mr Jeffrey Kirk of Appleby looks at the growing use of Bermuda insurance vehicles in Asia as more companies look for sophisticated services, products and flexible bespoke risk transfer mechanisms.

he global financial crisis continues to bite and, as is the case with other financial services sectors, the (re)insurance industry continues to face challenges emanating from the Eurozone debt crisis, low government yields and slowing growth coupled with increasing inflation. Notwithstanding the challenges, there are encouraging signs on the horizon for Asian (re)insurers. Whilst growth is expected to slow, the emerging Asian (re)insurance market is forecast to grow at a rate that will continue to outperform developed markets. AIAs CEO Mark Tucker has remarked that recent studies have revealed a protection gap of US$40 trillion in the life insurance sector in Asia and that this relates only to mortality cover; if health cover is added, that figure could double.

year. This follows an 11% growth in total gross premium written in 2010. Further, the continuing development of renminbi business is regarded as one of the growth engines for the Hong Kong (re)insurance industry. Growth in the primary insurance markets would also generally support growth in the reinsurance market. Some may question how these China (re)insurance growth views will, in fact, bear out once the final hard 2012 figures are released but the general outlook for 2013 is more optimistic.

The role of Bermuda (re)insurance vehicles

Bermuda is one of the worlds leading (re)insurance jurisdictions. A September 2012, A.M. Best report states that 15 of the worlds top 50 reinsurers are based in Bermuda. This figure does not include a number of Bermuda reinsurers whose holding companies are domiciled elsewhere but whom all make the top 50 and have substantial underwriting operations in Bermuda. In addition, Bermuda remains the worlds number one captive insurance domicile, with a total of 862 captives registered as at the end of 2011. Notwithstanding the global financial crisis, Bermuda has seen a significant increase (three-fold over the first quarter of 2012) in insurer registrations in the second quarter of 2012. This growth was driven predominantly by the increase in special purpose insurers (SPIs), which are popular vehicles employed in the issuance of catastrophe (CAT) bonds. In addition, a number of the new Bermuda reinsurance startups are backed by US hedge funds, which are a growing source of capital to the reinsurance market.

The burgeoning (re)insurance market in China

In 2011, the real growth rate of life insurance in China was weak, estimated by Swiss Re at -6%. However, the expectation is that life insurance premiums will grow in China, possibly at real rates of as high as 11% over 2012. The market view is that this growth in the protection-type products, added to the demand for annuities and health products, bodes well. In the non-life insurance sector, premium growth in China was strong, estimated at 15% in 2011. Increasing demand for car ownership as well as health and personal accident products may continue to drive this growth. In Hong Kong, the Commissioner of Insurance reported growth in both the life and non-life sectors over the past

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November 2012

Bermuda Focus

Growth of Bermuda (re)insurers in China

In December 2010 China and Bermuda signed a Tax Information Exchange Agreement (TIEA). The execution of this TIEA is a further step in the development of positive ties between these two jurisdictions and is likely to facilitate (re)insurance operations going forward. These opportunities have been grasped by, amongst others, the Bermuda-based Catlin Group which has offices in Hong Kong and Shanghai and which, in November 2011, entered into a partnership with PRC state-owned China Reinsurance (Group) Corp (China Re). Following this partnership, China Re has established and supplies capital for a special purpose syndicate at Lloyds of London. A Catlin subsidiary manages the syndicate. Further, earlier this year Catlin was granted approval by the China Insurance Regulatory Commission to open and operate a wholly owned representative office in Beijing.

Growth of captives and ILS Bermuda domiciled insurers in Hong Kong

Bermuda (re)insurance vehicles have, for decades, played a prominent role in the (re)insurance sector in Asia. In Hong Kong, of the 160 authorised insurers, 12 are Bermuda domiciled. As such, Bermuda is in joint second position (with the UK also having 12 domiciled Hong Kong authorised insurers) only behind Hong Kong with 85 domiciled insurers. These Bermuda insurers include subsidiaries from eminent (re)insurance groups such as ING, Sun Life, AXA, HSBC and AIA. The vast majority of the Bermuda-domiciled Hong Kong authorised insurers focus on and underwrite long-term business. In light of recent experience, it is also the case that a number of these (re)insurance groups who operate both Bermuda-domiciled Hong Kong authorised life insurers as well as life insurers domiciled elsewhere but also writing business emanating from Hong Kong, are looking to write more of their Hong Kong originating life business through their Bermuda vehicles. The growth and expansion of Bermuda (re)insurers in Asia is not limited to China. Ironshore Insurance recently opened a Singapore office as the next phase of the strategic expansion of its global platform. With the growth of China corporate groups and the resultant increase in insurance premiums necessary to insure such groups from the myriad of commercial risks they face, not surprisingly there has been much greater interest in the possibility of self-insurance and the setting up of stand-alone-captives or rent-a-captives. Bermuda as the worlds leading captive jurisdiction is well-placed to meet this demand. The growth in the insurance-linked securities (ILS) sector also marks an interesting development and one which is likely to appeal to Asian and particularly Chinese investors. The resurgence in the CAT bonds market in Bermuda is a case in point. CAT bonds are risk-linked securities that transfer a specified set of risks from a sponsor to investors. Historically, CAT bonds were used as an alternative risk transfer mechanism (together with the traditional catastrophe reinsurance) to transfer risk faced by (re)insurers from major catastrophes. From an investor perspective, the attraction of CAT bonds and other insurance-linked securities is that these securities are decoupled from the equities, and particularly listed equities, market. Consequently, ILS offers an investment alternative that is not at the mercy of market conditions and macroeconomic fluctuations caused by the global financial crisis, in the same way that is faced by the equities market.

Recent developments
From the perspective of the Bermuda-domiciled Hong Kong authorised life insurers, the 2011 amendments to the Bermuda Insurance Act 1978, so as to introduce five classes of Bermuda long-term insurers as opposed to the previous single class, is to be welcomed. The introduction of the five distinct classes, which range from the Class A wholly-owned or group affiliate captive to the Class E large commercial long-term insurer, reflect the Bermuda Monetary Authoritys (BMA) movement to a risk-based approach to supervision of (re)insurers in accordance with the stated target of being Solvency II equivalent. In addition, the recent 2012 amendments to the Insurance Act 1978, provide the BMA with greater flexibility to allow certain exemptions from its supervisory regime when the (re)insurers in question are being appropriately supervised by other regulatory authorities. This is of particular resonance to Bermuda-domiciled Hong Kong authorised life insurers. The BMAs proactive and collaborative approach to supervision has always been one of the major attractions of Bermuda as a leading (re)insurance jurisdiction.

The future
As Asia and China in particular, continues on its upward trajectory, the need for ever more sophisticated services, products and flexible bespoke risk transfer mechanisms will continue to grow. It is in this context that the Bermuda (re)insurance environment, vehicles and service providers are well placed to offer the greatest value to industry participants and to grow this sector in Asia as a whole.
Mr Jeffrey Kirk is a corporate & commercial partner in the Hong Kong office of offshore law firm Appleby.

www.asiainsurancereview.com

November 2012

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