Reinsurance by British Virgin Islands Insurers and Captives
This article also appeared in the August 2013 edition of the BVI International Finance Centre's newsletter. A copy can be found here.
Captive insurers have always been attracted to the British Virgin Islands ("BVI") for its familiar legal principles, administrative simplicity and the ability to ring-fence liabilities. The BVI is tax neutral in that it does not add extra layers of taxation on top of those taxes that a parent company pays in its home country.
The primary legislation in the BVI governing insurance (including reinsurance; both facultative reinsurance and treaty reinsurance) is the Insurance Act, 2008 (the "Act"). However, as regulation and supervision of financial services is both complex and technical, it is not considered practicable for the details to be contained in primary legislation. For these reasons, the BVI Financial Services Commission (the "Commission") - as the BVI's financial services regulator - is empowered to issue a regulatory code containing more detailed requirements that support the general framework established by the Act. The Commission has used this power to issue the Regulatory Code, 2009 (as amended) (the "Regulatory Code") which has the status of law in the BVI.
The Act and the Regulatory Code underpin the Commission's risk-based approach to the regulation of the insurance sector in BVI. The Commission recognises that the range of captives commonly used includes pure captives, group and/or association captives, rental captives, and diversified captives. As such, it applies the requirements of the BVI's Regulatory Code on a case-by-case basis, depending on the risk profile of the particular captive.
As a result of the delegated regulatory framework, and the risk-based regulatory approach taken by the Commission, BVI captive insurance companies can be extremely flexible in their structure and handling. This flexibility extends in an appropriate manner to the reinsurance arrangements of captives, which will often seek to reinsure risks outside the BVI insurance market.
Subsection 4(1) of the Act prohibits persons from carrying on "insurance business" (a defined term which expressly includes reinsurance business) of any kind in or from within the BVI unless such person holds the requisite licence issued under the Act. However, subsection 4(1) does not apply to, amongst other persons, an 'approved reinsurer' that enters into a reinsurance contract with a licensed insurer.
An approved reinsurer is defined under section 2(1) of the Act as an insurer that either satisfies the prescribed criteria for an approved reinsurer or is approved by the Commission as an approved reinsurer. For these purposes, the 'prescribed criteria' are that the reinsurer has a financial strength rating of A++, A+ or A- assigned to it by the A.M. Best Company or an equivalent financial strength rating assigned by an equivalent rating company.
A BVI insurer holding a category A licence must submit to the Commission, on an annual basis, a summary of its reinsurance arrangements, together with copies of all reinsurance treaties entered into and its audited financial statements. A foreign insurer holding a category B licence must submit to the Commission, on an annual basis, a summary of its reinsurance arrangements with respect to insurance business carried on in the BVI, together with copies of all reinsurance treaties entered into relating to that business and its audited financial statements.
Neither a BVI insurer nor a foreign insurer is required to retain part of the risk nor are they required to reinsure with a reinsurer located in the BVI. Therefore, there is no prescribed limit on the extent of the cession allowed to a foreign reinsurer. There is also no requirement for the foreign reinsurer to post collateral with the BVI insurer/foreign insurer in the BVI for the liability that the foreign reinsurer has accepted. Moreover, no limitations are prescribed under BVI law on the foreign reinsurer’s ability to retrocede all of the risk assumed to another foreign reinsurer.
The BVI continues to offer a solid domicile for captives, given the robustness of the legal and regulatory regime, as demonstrated by the flexibility of arrangements for reinsurance, and the strength in depth of local service providers who are experts in the insurance field.
For further information, please speak with your usual Maples and Calder contact or one of the individuals listed above.