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Bermuda Focus

60 s www.asiainsurancereview.com s November 2012

The use of Bermuda vehicles in Asia

Mr Jeffrey KirkofAppleby looks at the growing use of Bermuda insurance vehicles

in Asia as more companies look for sophisticated services, products and exiblebespoke risk transfer mechanisms.

The global nancial crisis continues to bite and, asis the case with other nancial services sectors, the(re)insurance industry continues to ace challenges

emanating rom the Eurozone debt crisis, low governmentyields and slowing growth coupled with increasing infa-tion. Notwithstanding the challenges, there are encouragingsigns on the horizon or Asian (re)insurers.

Whilst growth is expected to slow, the emerging Asian(re)insurance market is orecast to grow at a rate that will

continue to outperorm developed markets.AIAs CEO Mark Tucker has remarked that recent studies

have revealed a protection gap o US$40 trillion in the lieinsurance sector in Asia and that this relates only to mortal-ity cover; i health cover is added, that gure could double.

The burgeoning (re)insurance market in ChinaIn 2011, the real growth rate o lie insurance in China was

weak, estimated by Swiss Re at -6%. However, the expectationis that lie insurance premiums will grow in China, possiblyat real rates o as high as 11% over 2012. The market view isthat this growth in the protection-type products, added tothe demand or annuities and health products, bodes well.

In the non-lie insurance sector, premium growth inChina was strong, estimated at 15% in 2011. Increasing de-mand or car ownership as well as health and personalaccident products may continue to drive this growth.

In Hong Kong, the Commissioner o Insurance reportedgrowth in both the lie and non-lie sectors over the past

year. This ollows an 11% growth in total gross premiumwritten in 2010.

Further, the continuing development o renminbi busi-ness is regarded as one o the growth engines or the HongKong (re)insurance industry.

Growth in the primary insurance markets would alsogenerally support growth in the reinsurance market. Somemay question how these China (re)insurance growth views

will, in act, bear out once the nal hard 2012 gures are

released but the general outlook or 2013 is more optimistic.

The role of Bermuda (re)insurance vehiclesBermuda is one o the worlds leading (re)insurance jurisdic-tions. A September 2012, A.M. Best report states that 15 o the

worlds top 50 reinsurers are based in Bermuda. This guredoes not include a number o Bermuda reinsurers whoseholding companies are domiciled elsewhere but whom allmake the top 50 and have substantial underwriting opera-tions in Bermuda.

In addition, Bermuda remains the worlds number onecaptive insurance domicile, with a total o 862 captivesregistered as at the end o 2011.

Notwithstanding the global nancial crisis, Bermuda hasseen a signicant increase (three-old over the rst quarter o2012) in insurer registrations in the second quarter o 2012.

This growth was driven predominantly by the increase inspecial purpose insurers (SPIs), which are popular vehiclesemployed in the issuance o catastrophe (CAT) bonds. Inaddition, a number o the new Bermuda reinsurance start-ups are backed by US hedge unds, which are a growingsource o capital to the reinsurance market.

60 s www.asiainsurancereview.com s November 2012

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Bermuda Focus

www.asiainsurancereview.com s November 2012 s 61

Bermuda domiciled insurers in Hong KongBermuda (re)insurance vehicles have, for decades, playeda prominent role in the (re)insurance sector in Asia. InHong Kong, of the 160 authorised insurers, 12 are Bermudadomiciled. As such, Bermuda is in joint second position(with the UK also having 12 domiciled Hong Kong autho-rised insurers) only behind Hong Kong with 85 domiciledinsurers. These Bermuda insurers include subsidiaries fromeminent (re)insurance groups such as ING, Sun Life, AXA,HSBC and AIA.

The vast majority of the Bermuda-domiciled Hong Kongauthorised insurers focus on and underwrite long-term busi-ness. In light of recent experience, it is also the case thata number of these (re)insurance groups who operate bothBermuda-domiciled Hong Kong authorised life insurers as

well as life insurers domiciled elsewhere but also writingbusiness emanating from Hong Kong, are looking to writemore of their Hong Kong originating life business throughtheir Bermuda vehicles.

Recent developmentsFrom the perspective of the Bermuda-domiciled HongKong authorised life insurers, the 2011 amendments to the

Bermuda Insurance Act 1978, so as to introduce ve classesof Bermuda long-term insurers as opposed to the previoussingle class, is to be welcomed.

The introduction of the ve distinct classes, which rangefrom the Class A wholly-owned or group afliate captiveto the Class E large commercial long-term insurer, reectthe Bermuda Monetary Authoritys (BMA) movement to arisk-based approach to supervision of (re)insurers in accor-dance with the stated target of being Solvency II equivalent.

In addition, the recent 2012 amendments to the InsuranceAct 1978, provide the BMA with greater exibility to allowcertain exemptions from its supervisory regime when the(re)insurers in question are being appropriately supervisedby other regulatory authorities. This is of particular reso-nance to Bermuda-domiciled Hong Kong authorised lifeinsurers. The BMAs proactive and collaborative approachto supervision has always been one of the major attractionsof Bermuda as a leading (re)insurance jurisdiction.

Growth of Bermuda (re)insurers in ChinaIn December 2010 China and Bermuda signed a Tax Infor-mation Exchange Agreement (TIEA). The execution of this

TIEA is a further step in the development of positive tiesbetween these two jurisdictions and is likely to facilitate

(re)insurance operations going forward.These opportunities have been grasped by, amongst oth-

ers, the Bermuda-based Catlin Group which has ofces inHong Kong and Shanghai and which, in November 2011,entered into a partnership with PRC state-owned ChinaReinsurance (Group) Corp (China Re).

Following this partnership, China Re has established andsupplies capital for a special purpose syndicate at Lloyds ofLondon. A Catlin subsidiary manages the syndicate. Further,earlier this year Catlin was granted approval by the ChinaInsurance Regulatory Commission to open and operate a

wholly owned representative ofce in Beijing.

Growth of captives and ILSThe growth and expansion of Bermuda (re)insurers in Asiais not limited to China. Ironshore Insurance recently openeda Singapore ofce as the next phase of the strategic expan-sion of its global platform.

With the growth of China corporate groups and theresultant increase in insurance premiums necessary toinsure such groups from the myriad of commercial risksthey face, not surprisingly there has been much greaterinterest in the possibility of self-insurance and the settingup of stand-alone-captives or rent-a-captives. Bermuda asthe worlds leading captive jurisdiction is well-placed tomeet this demand.

The growth in the insurance-linked securities (ILS) sectoralso marks an interesting development and one which islikely to appeal to Asian and particularly Chinese investors.

The resurgence in the CAT bonds market in Bermuda isa case in point. CAT bonds are risk-linked securities thattransfer a specied set of risks from a sponsor to investors.Historically, CAT bonds were used as an alternative risktransfer mechanism (together with the traditional catastro-phe reinsurance) to transfer risk faced by (re)insurers frommajor catastrophes.

From an investor perspective, the attraction of CAT bondsand other insurance-linked securities is that these securitiesare decoupled from the equities, and particularly listed

equities, market. Consequently, ILS offers an investmentalternative that is not at the mercy of market conditions andmacroeconomic uctuations caused by the global nancialcrisis, in the same way that is faced by the equities market.

The futureAs Asia and China in particular, continues on its upwardtrajectory, the need for ever more sophisticated services,products and exible bespoke risk transfer mechanisms

will continue to grow.It is in this context that the Bermuda (re)insurance en-

vironment, vehicles and service providers are well placedto 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 Kongofce of offshore law rm Appleby.

Bermuda Focus