Bermuda: Solvency II: Reviewing Bermuda’s Regulatory Framework

Last Updated: 18 November 2014
Article by Appleby  

Solvency II, the European initiative to overhaul the capital adequacy regime of the European insurance industry and create an agreed set of capital and risk management requirements, is scheduled to come into effect on 1 January 2016.

Solvency II will introduce a new regulatory and supervisory framework for Europe's insurance industry. This framework is divided into three pillars:

  • Quantitative Requirements (Capital Requirements);
  • Governance & Supervision; and
  • Disclosure & Transparency.

The Solvency II Directive 2009/138/EC adopted on 25 November 2009 (Solvency II Directive), as amended by the Omnibus II Directive adopted on 11 March 2014 (Omnibus II Directive and together with the Solvency II Directive, Directive) is applicable to the European Union's insurance industry.

However, non-European jurisdictions may choose to achieve an equivalency status under Solvency II. Such jurisdictions will be assessed on three levels of equivalence with Solvency II:

  • Insurance considerations: treatment of third country insurance (specifically the need to collateralise insurance arrangements with assessments within the European Economic Area);
  • Group solvency calculation: ability to use local regulatory capital amounts in the Solvency II capital calculation; and
  • Group supervision: reliance on third-country for group supervision (i.e. European supervisors need only to consider individual entities within their jurisdictions on a stand-alone basis).

As Europe is the world's largest insurance market, with 35 per cent of the global market, non-equivalence with Solvency II would have a dramatic impact on the Bermuda insurance market and, in particular, on those insurance companies based in Bermuda with subsidiaries or parents in Europe for which compliance with Solvency II is mandatory.

Equivalence under Solvency II has long been considered by the Bermuda Monetary Authority (BMA) as a priority in order to keep Bermuda as a key jurisdiction in the global insurance industry. In particular, the BMA, with the support of the Bermuda government and the Bermuda insurance industry, has actively sought to ensure that the Bermuda regulatory regime for commercial insurers obtains third-country equivalency under Solvency II. Bermuda, Switzerland and Japan were the first countries to seek such equivalency.

In 2010, the European Commission tasked the European Insurance and Occupational Pensions Authority (EIOPA) to provide a preliminary assessment of the BMA's supervisory regime to determine whether it satisfied the general criteria for third-country equivalence. On 26 October 2011, EIOPA published its report, advising that Bermuda's regulatory framework for commercial insurers was broadly equivalent with the Directive.

EIOPA's report did, however, make a distinction between the supervisory regime for Bermuda's commercial sector and the BMA's supervision of its captive sector. This distinction is based on Bermuda's two-tiered approach to regulation of the industry (i.e. "bifurcated equivalency").

In the context of the Bermuda insurance regulatory regime, "bifurcated equivalency" means that Solvency II equivalent standards will apply to commercial insurers (i.e. Class 3A, 3B, 4, C, D and E insurers) but not to captive insurers (i.e. Class 1, 2, 3 and special purpose insurers). This is an application of the principle of proportionality, where the weight of regulation applicable to a particular class of regulated entity is proportional to the risks that such entity or class represents.

EIOPA's assessment of Bermuda's regulatory framework was consistent with the BMA's position that the principle of proportionality should be taken into account when considering the implementation of Solvency II. It is also intended that the Bermuda regulatory framework will have less constraining (but risk-appropriate) requirements for special purpose insurers (SPI) and captives writing affiliated business with group-owned entities.

The implementation of Solvency II pursuant to the concept of bifurcated equivalency is intended to preserve the unique component of the Bermuda insurance market as the oldest and largest captive marketplace and the premier jurisdiction for the issuance of insurance linked securities by locally domiciled SPIs.

As a consequence of the implementation of Solvency II, the BMA embarked on a programme of regulatory change with the aim of enhancing Bermuda's regulatory framework for commercial insurers to reflect a progressive risk-based approach to regulation.

The key elements include group supervision and prudential rules, more detailed solvency and financial models framework and disclosure and transparency requirements for commercial insurers registered in Bermuda.

This process was implemented by spreading the enhanced supervisory regimes to all classes of commercial insurers that conduct general and long-term insurance business.

Over the last three years, the BMA has spared no effort in transforming gradually the Bermuda regulatory environment. The work completed to date places Bermuda ahead of the jurisdictions preparing to meet the criteria necessary to achieve equivalence with Solvency II before 1 January 2016.

Article first published in The Royal Gazette, November 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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