Introduction
This article considers the state of the rent-a-captive market in Bermuda and considers how Bermuda facilitates participation in rent-a-captive arrangements.
Bermuda has been and continues to be the world’s leading captive and rent-a-captive insurance domicile since the captive concept was first introduced there in the 1960’s. There is no single reason why Bermuda has become the pre-eminent captive and rent-a-captive jurisdiction, but important factors include a highly sophisticated and high-calibre insurance infrastructure, globally accepted risk-based regulation which is facilitative yet responsible, a stable political environment and a highly developed reinsurance market (on par with the New York and London reinsurance markets) populated by a skilled and sophisticated workforce.
Rent-a-captive 101
Let us firstly explain what is meant by a rent-a-captive arrangement. Basically, this is a structure in which a sponsor (normally, an insurance captive manager) will set up an insurance company and ‘rent’ the capital, licence and capacity of the insurance captive to third-party programme participants. This is a particularly attractive structure for smaller companies for whom the cost of establishing a stand alone captive insurance company would otherwise be prohibitive. Although there may be exceptions, clients should be cautious about establishing their own stand-alone captives if the proposed programme will generate annual gross premium of less than $800,000. For these clients, participation in a rent-a-captive arrangement is a very cost-effective option enabling the client to enjoy many of the benefits of the captive structure without having to establish and operate a captive of their own.
There are many areas in which rent-a-captive structures have been used in Bermuda including the medical malpractice area. Whilst many medical-malpractice captives in Bermuda have been established as stand-alone captives, the rent-a-captive concept has found favour with some smaller health care programmes. Accordingly, for smaller hospitals, participation in a rent-a-captive may make sense initially being more cost effective yet giving the participant many of the advantages that a stand alone captive would, although over time the hospital may wish to establish its own captive insurer. It is also common for rent-a- captive participants over time to move towards establishing their own captive with the benefit of the experience gained as a rent-a-captive participant.
The need for legally segregated risk
In the context of these structures, participants of a rent a captive may agree contractually to keep their respective accounts separate and the assets and losses of each programme separate from the others but such arrangements would not of themselves be sufficient to afford legal watertight protection against the claims of third party creditors.
In order to achieve such a separation, it is necessary legally to segregate each participant’s programme from the programmes of other participants and of the rent a captive owner’s general account so that the assets of one programme participant are legally segregated from the liabilities of other programme participants and of the owner’s. Bermuda has introduced public legislation precisely to introduce into law this legal segregation which could withstand any attempt by creditors or a liquidator to marshal all of the assets of other unrelated participants and the company to meet the claims against a segregated account participant; this legislation is discussed below.
Bermuda’s legislative response to the need for legal risk compartmentalisation
In August 2000, Bermuda enacted The Segregated Accounts Companies Act 2000 (“SAC Act”) establishing by public legislation a registration system for a segregated accounts company (“SAC”) to operate segregated accounts or cells the assets of which are statutorily insulated or “fire-walled” from the liabilities of other segregated accounts or from the SAC’s general account.
The Bermuda legislature has continued to refine the SAC legislation and introduced in 2002 series of important amendments including the introduction of the concept that dividends could be paid on a cell-specific basis (without reference to the general account of the SAC or to other segregated accounts) and that cells could be liquidated on a cell-specific basis without regard to the other segregated accounts or to the general account.
The SAC Act is also flexible as to how participants can join the programme they opt for – they can do so either contractually or as holders of shares of the SAC (typically preference shares) linked to a specific segregated account. Significantly, it also allows different programmes to be designed for participants with different risk appetites and is inherently flexible. As mentioned above, the SAC Act statutorily establishes the fire-walling mechanism as the basic starting point but the legislation is inherently flexible and participants could opt for a different arrangement if they for example wished contractually to assume risks of other cells. This flexibility is one of the great strengths of the legislation.
Will the “firewall” hold in the storms of litigation?
The risk and accounting segregation concept set out in the SAC Act is not new to Bermuda – prior to 2000, Bermuda had permitted separate account or protected cell companies to be established by way of Private Act of the Bermuda Parliament (“Private Act”) and over 100such Private Act companies were in operation at the time of the introduction of the public legislation.
We note that though the concept has been around since the early 1990s, there is as yet no case law in Bermuda nor (so far as we are aware) any other offshore jurisdiction ruling on the legal enforceability of the protected cell concept. That is something that needs to be understood but the growing use of similar legislation in both the offshore and onshore legal markets adds to the expectation that the concept will withstand rigorous legal analysis when it is finally litigated though of course no assurance can be offered.
Conclusions
The Bermuda captive and rent-a-captive markets continue to thrive as Bermuda continues to develop its legislative framework. The SAC has become the vehicle of choice for rent-a- captive participants in Bermuda and we believe that trend will continue.
The rent-a-captive structure provides an ideal entrée into the captive arena for clients with smaller premiums and of course over time as premium volumes increase the client may decide to establish its own stand-alone captive and will be able to deploy its experience of being a rent-a-captive participant to good use.
Synopsis: Bermuda company law provides an ideal framework for conducting corporate takeover activity. Three mechanisms are available under the Bermuda Companies Act, 1981 (the Act), which can be used to acquire control of a Bermuda company.
Authors: Neil Horner and Bala Nadarajah
Published: The Captive & ART Review 2007 www.captivereview.com