Bermuda’s well established corporate regulatory regime offers a variety of corporate vehicles that can be used to support insurance-linked securities.

In 2019, the Bermuda Monetary Authority introduced the insurance class of collateralised insurers with the aim to refine the collateralised reinsurance market in Bermuda and increase the volume of ILS activity on the island.

These insurers have been operating in Bermuda since then, functioning as companies that are fully collateralised with the requisite capital required by the BMA from their inception.

The Insurance Act 1978, as amended, provides statutory guidance for insurance structures engaging in special purpose business. Under the legislation, special purpose business refers to insurance business where an insurer fully collateralises its liabilities to the insured parties through the proceeds of one or more of the following: a debt issuance where the repayment rights of the debt providers are subordinated to the rights of the insured; any other financing mechanism approved by the BMA; cash; or, time deposits.

Today’s column provides an overview of the different features of funding a collateralised insurer registered in Bermuda.

Collateralised insurers are a specific type of entity that can be registered with the BMA under the Insurance Act.

This classification was created to apply where an insurer engages in special purpose business but does not meet the criteria to be classified as a special purpose insurer.

This is because the collateralised insurer classification allows these licensed entities to not only provide flexibility in the types of collateral that can be used to fund the vehicle but also permits engagement with unrestricted cedants and participation in business underwritten with a more complex risk profile across multiple transactions, features not permitted for a special purpose insurer.

All funding mechanisms and business operations of collateralised insurers require the approval of the BMA.

One common approach to funding a collateralised insurer is through investor funding. The BMA outlines specific criteria that investors must meet to participate.

Once this criterion is met, investor funding may be channelled through the issuance of preference shares in the collateralised insurer or through the creation of certain financial instruments.

Many collateralised insurers use segregated accounts and are formed in Bermuda as segregated account companies or incorporated segregated accounts companies under the Segregated Accounts Companies Act 2000, as amended, or the Incorporated Segregated Accounts Companies Act 2019, respectively.

This structure enables the transactions collateralising the insurer to be separated, limiting liability to the individual cell used in each transaction.

Collateralised insurers can also conduct collateralised reinsurance on a funds-withheld basis, where reinsured liabilities are supported by a cedant insurer retaining legal ownership of the assets backing them.

Similarly, modified coinsurance may be employed, where a ceding insurer retains certain funds and the return on those funds is paid based on the cedant’s investment returns.

On the cost saving side, having a robust professional indemnity cover in place for a collateralised insurer’s operations demonstrates sound risk management and can lead to a more favourable assessment of operational risk by the BMA — and result in a reduction in the amount of capital they are required to hold under the Bermuda Solvency Capital Requirement.

The applicable BSCR model includes a component for operational risk, where collateralised insurers can qualify for an optional adjustment of up to 50 per cent of the operational risk charge (capped at $1 million) equal to a professional indemnity insurance cover, calculated as prescribed by the BMA or in an amount determined by the BMA.

The island’s strong corporate governance regime, appropriate risk management systems and established legal and regulatory framework — in addition to a collateralised insurer’s highly flexible structure — have made this new class attractive for investors and Bermuda insurers alike.

• Mya Gibbons is an associate on the insurance team in the corporate department at Appleby. A copy of this column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer