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Setting the record straight on Bermuda.

To the Editor:

I am writing on behalf of the Bermuda insurance community in response to an article in your September issue entitled "Making the Move Onshore" by Michael T. Rogers. We in Bermuda over the last few years have tried to stay away from the negative campaigns run by newer domiciles, especially Vermont. But this article is filled with misinformation, wishful thinking, and in some instances, stops just short of pure fabrication. In keeping with the adage "If you say it often enough, people will believe it," we think it an appropriate time to respond to articles of this type.

Mr. Rogers starts his article by mentioning "prominent insolvencies in Bermuda and the Cayman Islands." As with any mature jurisdiction that has in excess of 1,300 companies registered, Bermuda will undoubtedly not have seen the last insolvency among the companies domiciled here. This is no different from the well-publicized insolvencies in the United States over the last few years such as Mission, Ideal Mutual and others too numerous to name. In any free market, no matter how well regulated, there will be companies which fail for a variety of reasons; a system has not as yet been found to completely avoid it. As the newer domiciles attract more companies with increasingly complex business plans, in time they too will suffer much the same experience.

Mr. Rogers then refers to "unapproachable offshore finance ministries." This is a surprising comment from someone who has worked in Bermuda, as we have one of the most open and approachable ministries among the various domiciles. Verbena Daniels, who has been our registrar of companies for the last decade, has always encouraged captive owners and their managers to discuss with her the specifics of their captives and the industry in general. The "novel" approach taken by Vermont, however, is one which should cause captive owners concern. What can be given at the bargaining table in these situations can just as easily be taken away. Bermuda has a clear-cut and well-defined set of rules which apply to all companies registered here, and we make no apologies for not bargaining on an individual basis with companies wishing to use our domicile.

Mr. Rogers' continuing focus on Bermuda leads him to comment that its regulators continue to "apply outdated solvency and liquidity ratios to captives." As all of us in the business are aware, the Bermuda ratios were developed in 1978 to provide a framework which would satisfy the regulators as well as the companies domiciled here. Bermuda's experience in regulating captives for more than 20 years has indicated that the basic ratios and regulations remain sound, and when fine-tuning is required, appropriate action is taken. Our solvency ratio requirements were amended as recently as July 1989.

In his next paragraph, the writer quickly glosses over Vermont's approach to such items as "recognition of insurance and exemption from guarantee funds, joint underwriting associations and assigned risk plans." We are all aware of this current situation and of the fickle nature of onshore regulators. While the status quo might appeal to those now in office, it is unclear what the next group of regulators will do, and this is a major fear of anyone considering an onshore domicile. The future exposure of onshore captives to assigned risk pools, FAIR plans and guarantee fund assessments is very real and will always be a major deterrent to companies considering an onshore domicile.

In sharp contrast, Bermuda has ever since the inception of the insurance industry here, provided a framework within which our companies operate. Over the past 2 years there have been few, if any, surprises for those operating here. For example, all insurance companies domiciled in Bermuda are exempted from income taxes until the year 2016. This is obviously not something an onshore domicile will ever be in a position to do, and even if it did, past performance indicates that it would be subject to change by subsequent legislators.

The article then goes on to state that "The so-called Bermuda insurance market is witnessing the flight of many actuarial firms and reinsurance companies with the exception of financial reinsurers." The reverse is true, and as each year goes by, more of the major players in both the reinsurance and actuarial fields continue to be involved in the Bermuda market. Even those companies which stayed out of the business in the initial stages of the captive movement are now coming into the market as they realize that captive reinsurance is a prime growth area.

The article delves deeper into the realm of wishful thinking when it states, "[Onshore managers] are often able to customize software that allows them to provide reports to clients in a matter of days after the close of the period. Many offshore management companies are incapable of this task because the hefty duties on imported computers have made the cost prohibitive."

This is also false. On the contrary, Bermuda's captive management and insurance industry is among the world's most heavily computerized. Providing reports to clients days after the close of the period is not novel and new to us; we have been doing it for as long as the captive management industry has been in operation.

In fact, many of the larger Bermuda management companies with custom-made software and sophisticated computer systems have transferred this technology to their smaller Vermont operations and provide them with data processing support from Bermuda.

Mr. Rogers suggests that offshore reporting, for at least association captives, is more onerous than onshore reporting. The facts are somewhat different. In Bermuda, all companies prepare statutory financial statements and a statutory financial return on a prescribed format. The accounting mainly follows Generally Accepted Accounting Principles and the preparation of the documents takes three to four hours. In contrast, in Vermont pure captives have to complete an abbreviated version of the National Association of Insurance Commissioners' Financial Report, and association captives or risk retention groups must complete the full report. Anyone who has ever completed one of these reports will appreciate how daunting and expensive this task can be.

In his next paragraph, Mr. Rogers states, "Added to the cost of operating offshore, Bermuda has imposed a 5 percent payroll tax on captive managers as of April 1, 1990. " However, this tax is only 1 percent as of April 1 and is slated to build to 5 percent over a five-year period. This 5 percent payroll tax compares favorably to the 34 percent paid on profits by all onshore management companies, and it is thus difficult to see how this adds to the cost of offshore management. The next paragraph of the article states that "Many offshore management companies believe that once a captive is operating, no

further assistance is needed to structure the insurance program. This policy reduces them to no more than glorified bookkeepers." While this may well have been Mr. Rogers' experience during his brief sojourn as a middle manager in Bermuda, once again it bears no resemblance to what actually happens in the captive management industry as a whole. Bermuda managers have displayed the ability to respond to the changing needs of their clients, and it has been the cornerstone of our success.

Mr. Rogers contends that Vermont has "hired CPAs with offshore captive experience," which only serves to underline the expertise available offshore. It is evident that in general, the Bermuda management companies are far larger than their Vermont counterparts. Contained in their staff, therefore, are not only seasoned financial executives but also a vast number of insurance professionals. Many of these professionals have more than 25 years of experience in the industry gained not only in Bermuda but in their home countries. The international insurance expertise readily available in Bermuda is unsurpassed.

Tax Advantages

The article then goes on to discuss relative tax advantages at length. While there are still significant tax advantages to companies operating offshore, especially group captives which pay shareholder dividends, this has never been promoted as a major reason for forming an offshore captive. Responsible management companies, as are the vast majority in Bermuda, have always ensured that the fundamental business plan of a company is what drives the decision of whether or not to form a captive.

The next paragraph discusses members of group captives "being enticed by the short-run gains of low premiums and having returned to traditional and commercial carriers." We could be forgiven for believing that Mr. Rogers made the statement in relation to risk retention groups as opposed to group captives. In the short life of the Risk Retention Act, it has produced a plethora of groups which have failed to get off the ground or which have abandoned their business plans. In short, it has produced some spectacular failures, which many believe will be the forerunner of others to come. By their very nature, risk retention groups entice people on the basis of low premiums and initial capitalization, which does not promote the kind of shareholder loyalty many other group captives nurtured in the past.

Further on in the article Mr. Rogers describes the ease with which Vermont captive owners can take out a loan from their captives. Despite the impression he leaves, offshore captives are also free to loan funds back to their parent company as long as the captives continue to meet the required ratios. In addition, the regulators have the ability under the 1978 act to admit these loans as addmissable assets if they meet certain criteria.

Taking a Vermont example cited by Mr. Rogers, a company can incorporate a captive, meet all the capitalization requirements and then the day after formation and receipt of its insurance license simply take the funds back into the parent company. This is surely not the sign of responsible and prudent regulation within the domicile. When Mr. Rogers goes on to describe the logistics and effects of making a move onshore, he spends little time in describing the significant toll tax requirement payable by any captive electing to make the change. This is a significant amount, and for the majority of captive owners, one which they are not prepared to pay for what could be only marginal benefits and entry into the onshore regulatory arena. In keeping with the rest of his article, Mr. Rogers closes with the statement, "In the last year alone, as the number of offshore domiciles has dwindled, the number of captives in Vermont increased by 17, bringing the total to 175." Of course, he fails to point out that his chart shows that Bermuda continues to be the leader, not only in terms of number of captives registered but also in terms of new incorporations. The 1989 figure shows that Bermuda incorporated almost twice as many captives as its closest competitor the Cayman Islands.

This is a fairly complete response to Mr. Rogers' article, but for brevity's sake, we have not commented on several other inaccurate areas. Vermont, as with any new domicile, will undoubtedly attract companies, and as such, the managers and regulators should concentrate on getting their own house in order and should resist the temptation to engage in this kind of reprehensible negative campaigning. The "encyclopedia-salesman" approach might work when talking to a less sophisticated audience, but that is hardly the case when one refers to risk managers and others involved in the captive industry. We in Bermuda, and our colleagues in Barbados and the Cayman Islands, have always operated in a responsible and dignified manner. It is a shame to see this sort of misinformation being given to those in the captive industry.

As mentioned before, captive owners and advisers are a sophisticated group which has undoubtedly examined its many options. The expected rush onshore has simply not materialized and with good reason. Bermuda, as a case in point, provides a high level of service, a well-regulated and diverse industry and has an enviable track record.

We think it is important for a magazine of Risk Management's stature not to hand over total editorial responsibility when allowing these "unpaid advertisement"like articles to be printed. At the very least, you should ensure that such articles are written either by the governmental body in the jurisdiction or by one of the senior people in the industry who should take a more responsible attitude. If you look back at the media over the last decade, you will in no instance see anyone in Bermuda's government or insurance industry publishing articles of this sort. Rest assured, it is not an occupation in which we intend ever to engage.

Eric J.M. Arcay Secretary Bermuda Insurance Management Association
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:captive companies and insolvencies
Author:Arcay, Eric J.M.
Publication:Risk Management
Article Type:letter to the editor
Date:Jan 1, 1991
Previous Article:State law may change procurement rules.
Next Article:Author: I did not mean to bash Bermuda.

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