The Bahamas insurance sector is being given a major overhaul, with the passing of three key pieces of legislation to establish a new monitoring body that ensures both local and offshore practices meet international standards.
The Bahamas has long been trying to become a major offshore insurance centre, as well as housing a strong domestic insurance market, the two acting independent of each other. Combined, there are more than 100 firms operating in the sector, though there have been criticisms of both segments, with suggestions that a stronger regulatory framework was required.
The government has responded by activating and updating existing legislation. In mid-May, the house of assembly – the lower house of the Bahamian parliament – passed two bills, approving the Insurance Amendment Act 2009 and the External Insurance Act 2009, which between them extensively reformed the domestic and international insurance industries.
The new insurance law covering the domestic sector mandates the setting up of an autonomous Insurance Commission to regulate the local segment, rather than having a unit attached to the Finance Ministry. It also raises capital and solvency requirements and qualifying assets of those companies operating in the domestic market, while increasing reporting requirements.
"This would ensure that companies maintain quality assets in support of their quality liabilities," Prime Minister Hubert Ingraham told the parliament on May 18. "And, it will require all insurance companies to have assets placed in a statutory fund; that is a fund that is controlled by the state."
Just as significant were the changes to the laws governing the offshore insurance segment. As set out by the act, an external insurance firm is an insurance company registered and licensed in the Bahamas but doing business outside the Bahamas, while captive insurance describes an insurance company that insures the risks of its owners who are not in the business of insurance.
Such companies will now be required to employ a licensed Bahamian captive manager and have their accounts examined by an approved independent auditor with offices in the Bahamas. Along with paying set annual fees, companies in the segment offering life insurance will be required to have a paid-up share capital of at least $200,000, whilst other companies must have a minimum paid-up share capital of $100,000. This is in addition to the 20% of net premium income up to $7m per annum, plus 10% of the excess over $7m.
According to Lennox McCartney, the registrar of insurance companies, the reforms to external insurance regulations will have far-reaching effects on the industry.
"It will have a positive impact on the offshore financial services side of the industry because it will provide, in fact, a better framework – a more modern framework that meets international standards – and also more flexibility in designing products and services for the international insurance business," McCartney said following the passing of the legislation by the lower house of parliament.
At the end of June, the minister of state for finance, Zhivargo Laing, announced that the government would push forward with plans to establish a dedicated financial services authority to better regulate the country's financial sector, including the insurance industry. The new body, to be established as soon as legislation could be drafted, would provide for the creation of a chief executive officer to replace the superintendent of insurance, the executive director of the Securities Commission and the executive commissioner of the Compliance Commission, Laing told parliament during his budget address.
While the Bahamas has been active in the external insurance market for more than a quarter of a century, having first legislated regulations for the segment in 1983, neighbours Barbados and Bermuda have in recent years gained a larger share of the market, much of which stems from the US.
In part, the reforms being enacted by the government are an attempt to win back some of the market share lost to its nearby rivals but also to address concerns in the US and elsewhere over the international offshore financial system, including the insurance sector.
In May, President Barack Obama announced a series of measures aimed at the offshore financial sector, mainly dealing with US companies or individuals investing or transferring funds overseas as a means to avoid taxation. Due to come into effect in 2011, these new regulations could impact some of the captive insurers based in the Bahamas.
So too could the move by the Organisation for Economic Cooperation and Development in April to include the Bahamas on its gray list of countries that were not as yet in full compliance with the body's standards on fiscal transparency.
While both moves could have spurred the Ingraham government to speed up its reforms of the insurance sector, these changes have long been in the pipeline, undergoing a lengthy consultation process. The end result should be a better regulated insurance industry and one that will keep the Bahamas on the white list of offshore countries.