The Insurance Act 2005, which came into force on July 1 2009, introduced a new system for licensing and regulating domestic insurers based on the international standards prescribed by the Financial Action Task Force and the core principles of the International Association of Insurance Supervisors. Additionally, because it is based on the Modern Insurance Bill designed in 1973 by the Caribbean Law Institute, the act and accompanying regulations introduce a degree of harmonization with the insurance legislation of a number of other jurisdictions in the region.
The act provides for the establishment of an independent supervisory authority – the Insurance Commission of The Bahamas – with powers of regulation, inspection and supervision over insurance companies.
Only corporate bodies that are registered as insurers under the act may carry on insurance business in The Bahamas. An insurance or reinsurance company must apply to the commission for a licence. A company cannot be registered for both long-term and general insurance business and its constitutive documents must restrict its activities solely to the carrying on of insurance business.
Foreign companies must be lawfully constituted in accordance with the laws of the country in which they are incorporated and must have undertaken insurance business in that country for at least five years before the date of their application for registration. Also, such companies must appoint a person resident in The Bahamas to be their principal representative in The Bahamas.
Capital, financial and solvency requirements
The following shows the minimum paid-up share capital requirements for insurance companies:
- Long-term insurance business: $3 million
- General insurance business: $2 million
- Industrial life insurance: $1 million
- Other: As determined by the Commission
The actual required capital levels will vary depending on the business plan that must be submitted as part of the application process.
The act requires every insurance company to establish and maintain a statutory fund in a financial institution in The Bahamas which has been approved by the commission, and to provide both initial and annual statements to the commission for its review evidencing the particulars of the liabilities of the company in respect of which the fund is established and details of the assets comprising the fund.
Insurance companies are also required to make specific deposits which are to be placed in trust based on a trust deed and trustee approved by the commission.
The following shows the minimum assets to be deposited from commencement of operations.
- Life or health insurance business or both: $2 million
- Property and casualty insurance business: $1 million
- Entities not proposing to write any new business: $500,000
Additional requirements for foreign companies apply. Foreign companies carrying on long-term insurance business in The Bahamas must vest in trust assets equal to their liability and contingency reserves with respect to their policyholders in The Bahamas as established by the balance sheet of the company as at the end of its last financial year. Further, such companies must place in trust in The Bahamas assets equal to their liability and reserves, less the amount deposited on account of the business with respect to their policyholders in The Bahamas, as established by the revenue account of the company as at the end of its last financial year.
Insurers must meet a minimum margin of solvency (generally 5:1, net premium to capital or surplus), defined as the excess of the value of the company's admissible assets over the amount of liabilities. In each year after registration a company must have the following assets: (i) long term-insurance business – an amount equal to the total liabilities plus the minimum amount of capital required to satisfy the solvency requirements (ie, 20 % of the net premium income in its last financial year or $500,000, whichever is the greater amount); and (ii) general insurance business – an amount equal to total liabilities plus the minimum amount of capital required to satisfy the solvency requirement (ie, 20% of the company's first $10 million of net premium income in respect of general business and 18% of the amount by which the company's net premium in respect of general insurance business exceeds $10 million).
The regulations require domestic insurers to set aside certain reserve amounts to meet all claims on the insurance issued. The reserve requirements for companies doing general insurance business are as follows:
- 80% of the unearned net premiums computed pro rata per month as at the date of the statement of account;
- 40% of the annual net premium for the year of accounting as at the date of the statement; or
- such amount as is calculated actuarially if the actuarial basis is approved by the commission, whichever is higher.
In addition, companies carrying on general insurance business must provide reserves for meeting claims outstanding at the date of their annual statements of account and for meeting catastrophes as prescribed by the commission. The commission can exempt a company from providing such additional reserves or prescribe that the reserves be held in trust as a statutory fund.
Further protection is given to policyholders under the act. The act sets out those licensing and regulating intermediaries through which all insurers must sell or distribute their products. The act also empowers the commission to appoint an administrator to seize management and control of a company in certain circumstances (eg, if the business of a company is being conducted in a manner detrimental to its policyholders).
The act is a further example of the The Bahamas' commitment to meeting international standards with respect to prudent regulation while at the same time enhancing its financial services industry.
Guest Article by: Arthur Seligman, Lennox Paton