Insurance frequently asked questions

• What is a captive insurer?
  
• What are the benefits of forming a captive insurance company?
  
• Why use a fronting company?
  
• What is the role of an insurance manager?
  
• Is the insurance industry regulated by Government?
  
• How do I form a captive insurance company in Bermuda?
  
• Is there a minimum cash balance required?
  
• What are Statutory Financial Statements and Returns?
  
• What are the main differences between Statutory accounting and GAAP?
  
• Do I need an audit?
  
• Do I need an actuary to review my loss reserves?
  
• What is the difference between a loss reserve specialist opinion and an actuarial report?
  
• What is the definition of long-term business?
  
• Define an unrelated risk?
  
• What is, and how do I calculate, the minimum solvency margin?
  
• What is, and how do I calculate, the minimum liquidity ratio?
  
  

What is a captive insurer? A captive is a closely-held insurance company whose insurance business is primarily supplied and controlled by its owners and in which the original insureds are its principal beneficiaries.


Captive companies were originally formed to insure all or part of the risk exposures of a parent company. Over the years, some captives have expanded their activities to include the writing of third party business.


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What are the benefits of forming a captive insurance company?
• Tailoring and development of policies to fit organisational needs
  
• Cash flow benefits and actual reduction of insurance costs
  
• Significant returns for good risk management, often driving noticeable cultural change within the parent organisation
  
• Improved risk management flexibility and loss control information
  
• Commercial coverage for hard to place risks
  
• Taxation advantages of insurance accounting
  
• Stability of premiums
  
• Group/association captives create economy of scale in similar industries to insure similar risks at a lower cost, increasing purchasing power, negotiating abilities and spreading risk and overhead
  
• Direct access into the reinsurance market, rather than through a retail insurer

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Why use a fronting company? Some captives choose to utilise a fronting company for the following advantages:
• Effective claims handling requires a physical presence in various locations
• Where high volume, low value claims would result in significant administration costs
• If the parent desires to have, and be seen to have, the security of a 'household name' taking the primary risk.

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What is the role of an insurance manager? A vast majority of the more than 1,500 Bermuda insurance companies are run by insurance management companies. There are over 250 such companies incorporated in Bermuda and registered to manage insurance companies. These range from full-service firms with overseas resources to independent, one-person operations. Many of these management companies are affiliated with leading international risk management consultants or insurance brokers. The range of services provided includes feasibility studies, administration, insurance documentation, loss adjusting, accounting records, actuarial and underwriting services and data processing.

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Is the insurance industry regulated by Government? The regulation of the Bermuda insurance sector can be characterised as being a system of shared regulation. The regulators work closely with industry professionals through a number of committees.

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How do I form a captive insurance company in Bermuda? Insurance companies are required to be incorporated in Bermuda, or to receive a permit to operate from Bermuda. In addition, these companies must be registered as insurers under the provisions of the Insurance Act 1978. In recognition of the wide diversity of insurers now in Bermuda, companies are registered as one of four classes, depending on the type of business they write and the level of capitalisation. Different levels of regulations apply to each licence category. For example, the regulations become less onerous as the amount of third party business written declines.

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Is there a minimum cash balance required? Yes, there is a minimum cash requirement. However, the minimum depends in which class the company is registered.

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What are Statutory Financial Statements and Returns? Insurance companies are required to prepare annual statutory financial statements and a statutory financial return to be filed with the Registrar of Companies. These statutory financial statements are less complicated than the U.S. annual statement form and have been designed to require minimal adjustments from financial statements prepared under generally accepted accounting principles.

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What are the main differences between Statutory accounting and GAAP? In general, one of the various recognised 'GAAPs' (usually U.S., Canadian or U.K.) serve as the foundation for statutory reporting in Bermuda. The main differences with statutory accounting in Bermuda are:
• Prepaids and deferred expenses are considered non-admitted assets
• Loss reserves are shown net of reinsurance recoverables
• With the permission of the Minister, certain assets not normally allowed in GAAP may be recognised as assets in support of regulatory capital requirements

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Do I need an audit? The Act requires that an 'approved auditor' examine the statutory financial statements annually and issue an audit opinion on the company's Statutory Financial Return, which is filed annually with the Registrar of Companies.

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Do I need an actuary to review my loss reserves? It depends. If you write long-term business or if you are a Class 3 or Class 4 insurer then a loss reserve specialist certificate is required annually. As well, if you are discounting reserves to meet solvency margins or if more than 30% of premiums written are from professional liability business then you need an annual loss reserve specialist opinion. Class 2 insurers are required to file a loss reserve opinion triennially.

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What is the difference between a loss reserve specialist opinion and an actuarial report? The actuarial report is a document that describes the techniques and assumptions used in calculating the loss and loss adjustment expense reserve. The report often gives a range of appropriate loss and loss adjustment expense reserves and details how the range was calculated.


The Loss Reserve Specialist Opinion is a document required by the Bermuda Government. The purpose of this document is to ensure that a qualified loss reserve specialist has reviewed and opines on the loss and loss adjustment expense reserve. Unlike the actuarial report, the loss and loss adjustment expense reserve is a single estimate which is used in the company's financial statements.


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What is the definition of long-term business? Basically life, health or annuity business.

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Define an unrelated risk? Unrelated business, in relation to an insurer, means insurance business consisting of insuring risks of persons who are not shareholders in, or affiliates of the insurer; and related business, in relation to an insurer, means insurance business which is not unrelated business.

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What is, and how do I calculate, the minimum solvency margin? The Insurance Act provides that the statutory assets of an insurer must exceed its statutory liabilities by an amount greater than the prescribed minimum solvency margin. This margin varies with the class of the insurer, the insurer's net premiums written and loss reserve level.

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What is, and how do I calculate, the minimum liquidity ratio? The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets do not include unquoted equity securities, investments in and advances to affiliates, real estate and collateral loans, unless specifically permitted by the Minister of Finance. Relevant liabilities excludes deferred income tax and certain sundry liabilities.