Captive insurance companies have become an increasingly popular risk management strategy for businesses worldwide. This article will explore the cost of setting up a captive insurance company in Bermuda as well as the advantages that come with it.

Cost of Setting Up a Captive Insurance Company in Bermuda

Bermuda is home to over 700 active captive licenses, making it one of the world’s premier captive domiciles. The cost of setting up a captive insurance company in Bermuda depends on the type of insurance license required:

1. Initial Start-up Capital:

• Regulatory Requirements Class 1:
  • Single Parent (Pure Captive)
  • Only permitted to insure the risks of the owner and its affiliates.
  • Paid up share capital of $120,000.

Minimum Solvency Margin of Class 1 insurer is the greater of:

• • Capital & Surplus of $120,000, or
  • 20% of the first $6 million of net premiums written,
  • If in excess of $6 million, the figure is $1.2 million plus 10% of net premiums written in excess of $6 million, or
  • 10% of net discounted aggregate loss and loss expense provisions and other insurance reserves.

 

• Regulatory Requirements Class 2:
  • Single Parent or Multi-Owner
  • Permitted to insure the risks of the owner’s and its affiliates as well as not more than 20% of net premium written for the purposes of third-party insurance.
  • Paid up share capital of $120,000.

Minimum Solvency Margin for Class 2 insurer is the greater of:

• • Capital & Surplus of $250,000, or
  • 20% of the first $6 million of net premiums written,
  • If in excess of $6 million, the figure is $1.2 million plus 10% of net premiums written in excess of $6 million, or
  • 10% of net discounted aggregate loss and loss expense provisions and other insurance reserves.

 

• Regulatory Requirements Class 3:
  • Single Parent or Multi-Owner
  • Permitted to insure the risks of the owner’s and its affiliates as well as not more than 50% of net premium written for the purposes of third-party insurance.
  • Paid up share capital of $120,000.

Minimum Solvency Margin for Class 3 insurer is the greater of:

• • Capital & Surplus of $1,000,000, or
  • 20% of the first $6 million of net premiums written,
  • If in excess of $6 million, the figure is $1.2 million plus 15% of net premiums written in excess of $6 million, or
  • 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves.

 

2. Economic Substance (ES) Legislation:

Bermuda enacted ES legislation in 2018 in response to the EU’s Code of Conduct Group on Business Taxation with the objective of counteracting the effects of zero tax and preferential tax regimes around the world. The ES legislation and related guidance notes require that captive insurance companies (and other in-scope entities conducting a “relevant activity”):

• Are managed and directed from Bermuda;
• Have core income-generating activities undertaken in Bermuda;
• Maintain an adequate physical presence in Bermuda;
• Have adequate full-time employees in Bermuda with suitable qualifications; and
• Have adequate operating expenditure incurred in Bermuda in relation to the relevant activity of insurance.
• Bermuda captive insurance companies have been able to strike the right balance in terms of keeping running costs low while also ensuring that they satisfy the ES criteria.

 

3. Rent-A-Captive: A Rent-A-Captive in Bermuda offers organizations the benefits of a captive insurance company with efficient setup, minimal costs, time, and capital investment.

 

Also read: Overview of Bermuda Captive Insurance

 

There are five key steps to set up a captive insurance company:

Learn more about setting up a captive insurance company here.

1. Determine the Likely Captive Structure:

• Understand the different types of captive insurers (e.g., single-parent captives, group captives, Rent-A-Captive).
• Choose the structure that best suits your risk management needs.

2. Conduct a Captive Feasibility Study:

• A feasibility study assesses whether a captive program is viable for your organization.
• It evaluates risks, financials, operational readiness, and legal considerations.
• The study helps justify the decision to create a captive and demonstrates its benefits.

3. Create a Business Plan:

• Your business plan outlines the purpose, objectives, and operations of the captive.
• Include actuarial support for loss assumptions, reinsurance details, and capital requirements.

4. Select a Domicile:

• Choose a suitable jurisdiction for your captive insurance company. Bermuda is a popular domicile due to its robust regulatory framework and industry expertise.
• Consider factors like regulatory environment, tax implications, and infrastructure.

5. Preparation and Submission of a Captive Application:

• Compile all necessary documents, including the final business plan, applicable fees, certificate of incorporation (COI), and relevant forms.
• Submit your application to the Bermuda Monetary Authority (BMA) Insurance Licensing Department

 

Why should you set up a captive insurance company?

A captive insurance company offers several compelling benefits for your business. Let’s explore these advantages:

1. Risk Management Control: Captives provide organizations with direct control over their risk management strategies. By creating a captive, a company can tailor insurance policies to its specific needs, covering risks that traditional insurers may exclude. This customization allows for better alignment with the company’s overall risk appetite.
2. Cost Efficiency: Captives offer the potential for cost savings. Instead of paying premiums to external insurers, the parent company retains the premiums within the captive. Over time, this accumulated capital can be invested, generating returns that contribute to the captive’s financial strength.
3. Access to Reinsurance Markets: Captives have direct access to reinsurance markets. By reinsuring risks, captives enhance their capacity to handle large losses. This direct access streamlines the process and eliminates intermediary costs.
4. Risk Financing Flexibility: Captives allow companies to customize policy limits, deductibles, and coverage terms. This flexibility ensures that risk financing aligns precisely with the organization’s risk profile and financial goals.
5. Strategic Tax Planning: Choosing the right domicile for the captive can lead to tax advantages. Certain jurisdictions offer favorable tax treatment for captives, allowing companies to optimize their tax positions.
6. Risk Retention and Profit Sharing: Captives enable companies to retain risk rather than transferring it entirely to external insurers. When claims experience is favorable, captives can share in the profits generated.
7. Long-Term Stability: Establishing a captive demonstrates a commitment to long-term risk management. It provides stability and continuity, especially during market cycles when traditional insurance rates may fluctuate.

 

Conclusion

The cost of setting up a captive insurance company in Bermuda can be done quickly and efficiently with our experienced team. IML is well-positioned to assist you in making an informed decision about whether Bermuda is the ideal location for your Captive. Additionally, IML’s insurance design and formation services will guide you through the captive set-up process.

In addition, our insurance management services are pivotal in assisting captive insurance companies manage the captive business and fulfill economic substance requirements. We offer comprehensive support to ensure your robust presence in Bermuda, effective management of your captive’s risks, and adherence to all relevant regulations. If you would like to discuss this in more detail, please feel free to contact us at [email protected].