In response to the recent global initiatives targeting offshore financial centers, the Bahamian government has taken steps to bolster its financial services sector through the enhancement of legislation regulating offshore products that are in high demand. An example of this is evidenced by the introduction of the External Insurance Act, 2009 (“EIA, 2009”), which came into force on the 19th August, 2009. Part I of this Article is intended to introduce readers to the EIA, 2009 while Part II highlights some of the benefits of conducting external insurance business in or from within The Bahamas.
The EIA, 2009, which has repealed the External Insurance Act, 1983 as amended, modernizes the legislation and regulations applicable to external insurance business and provides a response to the demand for cost effective means of entering into captive or self insurance by small to medium sized enterprises while satisfying international standards.
##Who does the EIA, 2009 apply to?##
The EIA, 2009 regulates and controls the following persons involved in the provision of services relating to the offshore insurance business in or from within The Bahamas:
1. Any “external insurer,” being a company “carrying on external insurance business.” “External insurance business” is defined as “insurance business where the risk is located outside of The Bahamas”;
2. Any person holding himself out as carrying on external insurance business;
3. Any person providing or purporting to provide “insurance management services” which includes “…the provision of accounting, administrative, brokerage, underwriting and claims processing in respect of external insurance business”;
4. Any person acting or purporting to act as an “insurance manager” providing insurance management services; or
5. Any “external insurance broker” which is “a company licensed under the Act, (not being an external insurer) who, for commission or other compensation brings together, with a view to carrying on external insurance business, persons seeking insurance or reinsurance and insurance or reinsurance undertakings, carries out work preparatory to the conclusion of contracts of insurance or reinsurance, and where appropriate, assists in the administration and performance of such contracts.”
The persons referenced at items (1) and (2) comprise external insurance companies and the persons referenced at items (3) to (5) comprise external insurance intermediaries.
The offshore insurance industry in The Bahamas is regulated by the newly established Insurance Commission of The Bahamas (the “Commission”). The EIA, 2009 empowers the Commission to license external insurance companies and external insurance intermediaries and to make regulations, rules and guidelines to supervise its licensees.
The EIA, 2009, also requires every external insurance company, licensed by the Commission, to appoint a resident representative in The Bahamas prior to commencing external insurance business. The resident representative acts as the liaison between a licensee and the Commission and maintains such books and records of the licensee as the Commission may require from time to time.
Additionally, the resident representative is required to report to the Commission its awareness of the likelihood of a licensee being unable to pay its debts; or of its having reason to believe that certain events have occurred with respect to its licensee, such as non-compliance with requirements of the EIA, 2009 or the licensee ceasing to carry on business under its license.
The EIA, 2009 mandates that an External Insurance Company and External Insurance Intermediary must be incorporated as a company. While an External Insurance Intermediary is limited to taking the form of a company incorporated pursuant to the International Business Companies Act, 2000 or the Companies Act, 1992 (a “Bahamian Company”), the EIA, 2009 provides that an External Insurance Company may take the form of either a Bahamian Company or a company incorporated outside of The Bahamas.
An application for licensing of a company incorporated outside of The Bahamas by the Commission must be accompanied by the information specified under the EIA, 2009 including evidence that:
(i) it is lawfully constituted and duly authorized and licensed to undertake insurance business in accordance with the laws of the country where it is incorporated;
(ii) it has undertaken insurance business in that country for a period satisfactory to the Commission and is subject to regulations in its country of domicile under a regime which in the Commission’s opinion is at least comparable to that of The Bahamas.
The Commission has the discretion to approve or refuse the application of any external insurance company or external insurance intermediary for licensing; however, if the Commission refuses a license, the applicant must be notified in writing of its reasons for such refusal and set out to the applicant, it or its rights to appeal the Commission’s decision.
If the Commission approves an application for licensing and the external insurance company applying has paid the relevant fee, the Commission may designate it as either:
(i) a restricted external insurer, which is an external insurer that only underwrites the risks of:
* its members, subsidiaries and affiliates (captive insurers);
* reinsureds, not being members, subsidiaries and affiliates who acknowledge in writing that they know and accept that the external insurer is a restricted external insurer; and
* such other persons as the Commission may approve; or
(ii) an unrestricted external insurer which is an external insurer that is not a restricted external insurer. Moreover, the Commission may specify the class or classes of insurance business in which the licensee may engage.
External insurance companies designated as either restricted or unrestricted external insurers are required to maintain a minimum paid-up capital or contributed reserve fund (in the form of cash or such assets in such amounts), as may be prescribed or approved by the Commission, which amount will depend on its designation.
Additionally, the Commission has the authority to prescribe that a licensee maintain in easily realizable investments (cash, short term securities, funds) for prompt payment of claims, provided that such amount will not exceed 40 percent of the total annual net premium income of the licensee.
An external insurance company which is a Bahamian Company is required to provide the Commission with a copy of its audited financial statements prepared by an independent auditor approved by the Commission in addition to an independent auditor’s report prepared in accordance with international accounting standards or such other form as the Commission may prescribe, not more than four months after the close of the financial year of a licensee (or such longer period as the Commission allows).
An external insurance company incorporated outside of The Bahamas is required to furnish the Commission with a certificate issued by the overseas regulatory authority in the country in which it is incorporated; or any other country where it is authorized and licensed to undertake insurance business, confirming that the licensee is complying with all the applicable insurance supervisory requirements of that overseas regulatory authority within four months of the end if its financial year.
External insurance companies and external insurance intermediaries in existence prior to commencement of the Act
The EIA, 2009 provides that all external insurance companies carrying on business immediately prior to its coming into force shall have a twelve–month period or such longer time as the Commission may designate to comply with the Act or its regulations. Additionally, external insurance intermediaries carrying on the business of underwriting managers or external insurance brokers immediately prior to commencement of the Act, which intend to continue to carry on such business must make an application for licensing within one month of the date of commencement of the Act.
##Benefits of carrying on external insurance business in The Bahamas##
Historically, offshore insurance companies have been vehicles used by large, multifaceted corporations to reduce the cost of purchasing conventional onshore insurance through self insurance. Commentators have noted that the continuous increases in onshore commercial insurance premiums to cover the costs of the commissions, expenses and profits of onshore insurers, have lead to an expansion of the market for offshore insurance to include small to medium sized enterprises.
The establishment of an external insurance company in The Bahamas by an onshore entity would result in a reduction of the costs associated with insuring its risks in addition to exemption from taxation, and asset protection.
##Exemption from taxation##
While there are currently no taxes on income and capital under Bahamian law, if at any time in the future such taxes were to be imposed, neither an external insurance company licensed under the EIA, 2009 or the proceeds or avails of any policy of life insurance or annuity contract issued by such external insurance company would be expressly exempt from payment of any tax, duty, fee or impost in The Bahamas other than any provisions for the same in force at the commencement of, or payable in respect of a license under, the EIA, 2009 for a period of twenty years from the date of the first license of the external insurer.
The EIA, 2009 provides for the establishment of segregated accounts by an external insurance company conducting “variable insurance business” as defined under the Act. The assets of a client held in any such segregated or separate account will not form any part of the liability of the insurance company. Accordingly, in the event of liquidation of an external insurance company, licensed under the Act, the client’s assets will not form a part of the general assets of the insurance company and therefore will not be available to creditors of the insurance company.
The EIA, 2009 also restricts the distribution of any assets held under a policy of insurance issued on the life of the policy holder or another person, to any third party not designated in the policy and further makes the proceeds of such policy exempt from the claims of any creditor of the policyholder, or the insured, or the estate of either of them, and of any other beneficiary (or other claimant other than a beneficiary under the policy) or the estate of any beneficiary under the policy. Similar protection is granted to the holder of any annuity contract issued by a licensed external insurance company.
In addition, the EIA, 2009 has incorporated the asset protection mechanism set out in the Fraudulent Dispositions Act, which provides the basis for offshore protection of trust assets, by providing the specific circumstances in which an action may be pursued by a creditor of a policy holder who hopes to be paid out of the assets of the separate account held by the licensee for the benefit of such policy holder. A creditor may make a claim to attach rights or interests in the policy only where: (i) the purchase of the policy was made with the intent to willfully defeat an obligation owed to the creditor by the policy holder; or (ii) proceedings in bankruptcy have been commenced by or against a policy holder at the date of the purchase of the policy or within three months of the date of the purchase of the policy. If an action or claim is not commenced within two years of the date of the relevant disposition, it is time barred by the provisions of the EIA, 2009.
The new legislation presents an update to the regulatory framework of offshore insurance business in The Bahamas that meets international standards while integrating innovative features which are unique to the jurisdiction.
*Guest Author: Nadia J. Taylor, an Associate with Law Firm Higgs & Johnson. Nadia Taylor is qualified to practice law in the State of Florida and The Bahamas. She counsels clients in many areas of Commercial Law, specialising in Trusts and Banking & Compliance Law and Securities Law. Article was first published in FOCUS, the newsletter of Higgs & Johnson.*