Economic substance regulations want to ensure that companies are generating profits in the domicile where they are incorporated.
- Meg Green
- August 2019
The Economic Substance Act and the Economic Substance Regulations were hot topics at the Bermuda Captive Conference. Becky Vernon, senior counsel at ASW Law discussed the details of the regulations with AMBestTV.
Why is economic substance important in regulatory terms?
Economic substance is a big change that we've seen introduced. It was introduced at the end of last year. [with the] Economic Substance Act and the Economic Substance Regulations. They are not just affecting Bermuda, they are affecting a lot of other global, other offshore jurisdictions.
The aim of the legislation is for companies to demonstrate that where they're incorporated is where they actually are generating their profits and that they actually have an economic substance on the island where they say that they're incorporated.
It's been an EU-driven initiative. A lot of companies have implemented new legislation to do this. The insurance sector is affected in the sense that insurance is a regulated activity for the purposes of the legislation.
We're hoping that for a majority of the companies, it's not going to result in too many changes that they'll need to make, particularly because the Insurance Act, some of the provisions there are drafted in such a way that companies here have to already have economic substance for the purposes of that legislation.
The period for implementing any changes for existing entities was the 30th of June. A lot of people are now working to analyze whether they do need to make any changes and obviously put those in place if necessary.
Will captives be more impacted than regular commercial insurers?
I think it could potentially affect them more because captives aren't subject to the head office requirement of the Insurance Act which the commercial insurers are. Captives can demonstrate substance in various other ways.
Pretty much most of the captives will have a Bermuda-based insurance manager. They'll have a Bermuda-based corporate services provider. They will have Bermuda resident directors.
From that perspective, they are demonstrating that they have substance here. They travel to Bermuda. They hold their board meetings.
One of the key factors in demonstrating economic substance is that the company is managed and directed from Bermuda. It's important that the key decisions are taking place here, the underwriting is taking place here.
I think although captives face a greater challenge than the commercial insurers, it's not going to be a huge mountain for them to climb in order to comply.