Bermuda: new protection for policyholders in the event of insolvency
The Insurance Amendment (No. 2) Act 2018 (the Act) has been passed in both the House of Assembly and the Senate and now awaits royal assent from the Governor. The Act will introduce a new “waterfall” of priorities in a winding up of an insurer, being the order in which creditors are paid from the assets of an insolvent company.
This means that in a winding up of an insurer commencing on or after the applicable commencement date, the claims of unsecured policyholder creditors of the insurer (including persons reinsured by the insurer in respect of claims under such contracts of reinsurance) will be paid before the claims of all other non-preferential unsecured creditors.
Impact on policyholders
The applicable commencement date for long-term (life) insurers - other than long-term insurers also carrying on general (i.e. property/casualty) business - is the date on which the Act receives royal assent.
The applicable commencement date for general insurers - including general insurers also carrying on long-term business - is 1 January 2019.
The result of the reforms will be the legal subordination of the unsecured claims of, for example, an issuer of a letter of credit (LOC) that was applied for by the insurer, for indemnity by the insurer in respect of the costs of honouring presentations under the LOC, to the claims of policyholders. The unsecured claims of outwards reinsurers will also be subordinated to the claims of policyholders.
The reforms do not affect the existing priority of preferential creditors such as employees and the government in respect of unpaid taxes and rates.
Reform of s24 of the Insurance Act 1978
The opportunity presented by the reform of creditor priority has been taken to resolve certain issues regarding s24 of the Insurance Act 1978. Section 24 requires long-term insurers to (among other things):
- Maintain accounts in respect of their long-term business separate from any accounts in respect of any “other business”
- Only pay long-term liabilities out of the long-term business fund
- Only pay other business liabilities out of assets attributable to their other business.
Amendments to s24 will clarify that it applies (with some exceptions) only to insurers carrying on both long-term and general (i.e. property/casualty) business. References to the “other” business of a long-term insurer have been amended to refer to the “general” business of the insurer. The process by which a liability of an insurer is attributable to a particular business (long-term or general) of the insurer has also been clarified. Attribution will depend on how the liability is or should be reported in the insurer’s statutory financial statements.
Waterfalls for insurers carrying on both long-term and general business
Separate “waterfalls” will apply (with some exceptions) in a winding up of an insurer carrying on both long-term and general business, implementing the aforementioned priority of policyholder creditors but with some structural enhancements.
- As before, the two business funds (long-term and general) must be applied to pay respective liabilities of the two businesses in a winding up.
- However, policyholder debts attributable to each business must be paid out of assets of the relevant business fund before other non-preferential unsecured debts of the insurer are paid.
- Where there is a surplus in a business fund after paying preferential and policyholder debts of the relevant business, the surplus may be used to pay off any preferential and/or policyholder debts attributable to the other business that were not satisfied out of the assets of the other business fund owing to a deficit in that business fund.
- Once any such preferential and policyholder debts have been paid in full, the assets of both business funds are pooled to pay general unsecured creditors of the insurer (i.e., general unsecured creditors will be paid out of pooled assets regardless of the business to which such creditors’ claims relate).
In order to ensure absolute certainty regarding the operation of these provisions, it is anticipated that further amendments will be tabled later in the year.
Changes to s19 of the Insurance Act 1978
As a result of amendments to s19 of the Insurance Act 1978 made by the Proceeds of Crime (Miscellaneous) (No. 2) Act 2018, the prohibition on carrying on non-insurance business, which previously applied only to commercial insurers, has been extended to captives and special purpose insurers. As a result, no insurer may carry on non-insurance business, except as ancillary business.
These changes represent an important milestone for the jurisdiction and bring the law applicable to the winding up of insurers in Bermuda into line with similar regimes in other major insurance centres.