Bermuda Special Purpose Insurers and Collateralized Insurers

Insurance linked securities (ILS) are tradable instruments issued in public or private offerings that have embedded insurance risk. Because the value of the instruments responds to insured risks, such as the risk of a natural catastrophe, performance is not correlated with traditional asset classes, which are affected by credit and market risks and geopolitical developments. The lack of correlation with traditional asset classes makes ILS an attractive way of diversifying an investment portfolio.

Through the use of a special purpose vehicle, or “transformer”, ILS carve out the direct credit risk of the insurer, leaving pure, embedded insurance risk. ILS structures are used for catastrophe bonds, reinsurance sidecars, contingent capital structures, mortality bonds, longevity swaps and industry loss warranties.

While offering diversification to investors, they allow insurers and reinsurers to tap a wider source of reinsurance or retrocession capacity than is offered in the traditional insurance and reinsurance market.

Bermuda pioneered the use of ILS when it established the Special Purpose Insurer regulatory framework in 2009. Special Purpose Insurers act as transformers in ILS transactions.

Bermuda’s alternative capital sector (including ILS, collateralized reinsurance, sidecars and more) represented approximately 73% (or roughly BD$71 billion) of global capacity in the sector in 2018.

As well as hosting the premier ILS industry, it is home to the underwriting operations for more than 30 major commercial international insurance and reinsurance firms and is the largest supplier of catastrophe reinsurance to US insurers.3 At the end of 2019, there were 1,200 insurers and reinsurers registered in Bermuda holding total assets in excess of BD$800 billion and writing gross premium of approximately BD$150 billion.

Alternative capital is here to stay and Bermuda remains the dominant jurisdiction for registration of ILS entities.

This paper provides an overview of the licensing requirements and process, the prudential and conduct standards that a Bermuda insurer carrying on special purpose business will need to meet and the on-going filing and other requirements that it will need to comply with. It is not, however, a substitute for legal advice.