One-stop Insurance Shopping

An agreement between Canada and Bermuda quietly came into force this summer that provides for an exchange of information between the two countries on tax matters. It creates a framework within which tax authorities of one country may obtain information relating to their citizens or corporations in the other. As a by-product, the Tax Information Exchange Agreement (TIEA) has immediately reduced the cost for Canadian companies to gain access to cutting edge risk management products from Bermuda’s insurance centre.

Background

The TIEA¹ was actually signed in Bermuda by the two countries in June 2010. It officially came into effect in July 2011.
The agreement bears some resemblance to others signed by a host of nations as part of a “tax harmonization” initiative of the Organisation for Economic Co-operation and Development (OECD). But none of the others will provide to Canadian companies the same comprehensive, “one-stop-shop” insurance advantages they can now derive from the Bermuda market as a result of the TIEA.

A key initiative today is “tax harmonization.” This June, OECD secretary general Angel Gurria urged tax officials from the world’s leading nations to begin discussing how they can dovetail their tax regimes. Bermuda has negotiated 25 TIEAs with other nations, including one with Mexico that has also removed an artificial barrier to Mexican companies doing business in Bermuda.

The new pact with Canada provides many business and financial advantages to Canadian entities, including fund managers and investors. Growth is expected in cross-border trade with more than 1,100 Bermuda companies with Canadian interests.

Benefits of TIEA

The TIEA’s value in risk management circles and for other financial services industries is related to Canadian income tax regulations. These were changed in 2008 to open up opportunities previously available only to the country’s tax treaty partners. The TIEA with Canada allows active business income earned by a foreign affiliate of a Canadian corporation resident in the TIEA country and carrying on business there to be included in exempt surplus. It means dividends paid to the Canadian corporation by the affiliate are not subject to Canadian tax.

The regulations make the exempt surplus favourable treatment available for the taxation year of a foreign affiliate in which the TIEA enters into force. Therefore, if a particular TIEA is ratified in 2011, a foreign affiliate that has a taxation year based on the calendar year will be eligible to earn exempt surplus for its entire 2011 taxation year.

Bermuda’s Captive Market

Many Canadian and Mexican companies have operated captive insurance companies² in Bermuda, but the numbers are limited today because of historical tax barriers. Still, the advantages of captive insurance in the Bermuda market are so useful that 27 Canadian-owned captives have elected to live with any fiscal burden. They are operating in Bermuda with assets approaching $10 billion. They are among about 850 captives with parent corporations in many countries enjoying the benefits of being not just in a captive domicile, but in a true insurance centre.

Captive insurance companies in Bermuda had about $120 billion dollars in assets in 2009 and wrote about $33 billion in premiums. It is just a part of the overall insurance and reinsurance sector. No jurisdiction demonstrates more knowledge about captive insurance than Bermuda. It is the bedrock upon which the “Insurance Island” was built.

The Bermuda industry is significant, especially with regard to big risks. Almost any time a major catastrophe occurs in the world today, at least one Bermuda reinsurer is on the hook. Catastrophe claims cost Bermuda reinsurers more than $6 billion in the first quarter of this year alone. They are paying claims to insurance companies to help rebuild towns and cities. In Australia, a 650-kilometre-wide, killer cyclone Yasi, the largest in the country’s history, tore through Queensland in February. That same month, an earthquake leveled parts of Christchurch, New Zealand. A massive earthquake and tsunami struck Japan’s northeast coast in March. It takes a significant market to handle these exposures.

The overall Bermuda international insurance market had combined aggregated assets of $500 billion dollars in 2009, with premiums totaling about $120 billion. The broad expanse of insurance opportunities has made Bermuda compelling as a captive domicile for companies from around the world.

One major advantage for companies accessing the Bermuda market for their reinsurance needs is that they can essentially “one-stop-shop.” Companies can cover off their commercial market needs and captive meetings in the same trip – less than three hours out of Toronto and about 600 miles off the coast of North Carolina.
 
Setting a Regulatory Example

In the face of a changing global regulatory climate, owners of Bermuda captives have been heartened by Bermuda’s role in defending the interests of all captive owners in all captive domiciles. Bermuda regulators, for example, led the campaign to have captive insurers treated differently from commercial insurers under the impending regulatory changes associated with the European Union’s new solvency regime.

Solvency II involves the European Union’s move to facilitate the development of a single market in insurance services in Europe. It seeks to update regulatory requirements for insurance firms that have European risks. The measures would establish a single licence for insurers, an “EU passport,” that would be recognized by all member states.

Captives, regardless of where they are located or where their owners are based, would be subject to Solvency II if they already have European risks or if they assume such risks in the future. The proposed reporting requirements and solvency standards could be onerous for captives.

The Bermuda Monetary Authority (BMA), Bermuda’s financial services regulator, has been working towards obtaining an equivalency status. This would allow Bermuda to be recognized as adhering to the regulatory standard and principles of Solvency II and in the same regulatory league as EU passport countries.

The BMA’s various representations have helped European Union officials understand why captives need to be treated separately from commercial insurance companies. The BMA has supported similar representations by others, including the Bermuda umbrella captive management organization, the Bermuda Insurance Management Association.

Bermuda has long been considered a blue-chip financial services centre by leading businessmen from Fortune 500 companies. And most recently, despite a checkered history of some public policymakers suspiciously viewing all “offshore” markets as “tax havens,” policymakers have made a clear effort recently to separate the “wheat from the chaff.”

For example, even knowledgeable politicians today are aware of the robust nature of the Bermuda regulatory process. The BMA is not just a comprehensive financial services regulator on the island; it is a charter member of the International Association of Insurance Supervisors. Also, Bermuda’s ministry of finance does not hesitate to join the deliberations of international standards-setting bodies for financial services. In June 2011, they hosted 100 representatives – including government ministers from G20, G8, EU and OECD countries – for the third meeting of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. Bermuda is vice chair of the global forum’s steering group.