Bermuda: Solvency II Ahoy!

Last Updated: 7 January 2016
Article by Michael Frith

Bermuda now has an effectively bifurcated regulatory regime for (re)insurance in the run-up to Solvency II, writes Michael Frith.

Bermuda has long been recognised as one of the premier global insurance and reinsurance centres.

Nearly every major insurance or reinsurance group in the world has some connection to the island, while captive insurers (913 of them, at last count) have been calling Bermuda home for decades. The island's well-deserved reputation for innovation means it is also the jurisdiction of choice for the rapidly evolving and ever-expanding insurance-linked securities market (Bermuda domiciled entities accounted for 69 percent of all cat bond issuances in the last quarter alone).

There are of course a great many reasons for this extraordinary success. The island has some of the industry's greatest intellectual capital concentrated in the offices of Hamilton, all within easy, Bermuda-shorts-wearing walking distance of each other. Our infrastructure is modern, effective and resilient even in the face of major storms (major storms being a risk intimately understood by Bermudians for centuries before sophisticated catastrophe models began informing risk managers and investors around the world). And let's face it, you can't argue against the Bermuda sunshine when a winter ice storm brings traffic to a sliding halt in the streets of Manhattan.

But there is one constant, steady resource that, more than any of these other key factors, really deserves recognition – our regulation.

Bermuda's insurance regulation – and of course the Bermuda Monetary Authority (BMA) – has, throughout the 50-plus year evolution of the island's insurance industry, proved itself time and again to be pragmatic, flexible and effective. Bermuda's approach to regulation has always been to ensure that it is risk-based, and the industry has thrived as a result. The responsibility for effective regulation, having full regard to the needs of policyholders without ignoring commercial realities, is something that Bermuda and the BMA take very seriously.

Among the best examples of how Bermuda's sophisticated and commercial approach has been applied is when new regulatory standards are introduced. Global standards of insurance regulation have evolved dramatically in the past decade and Bermuda and the BMA have been at the forefront of these regulatory developments.

The BMA is an active participant in the proceedings of the International Association of Insurance Supervisors, and the weight that its experience and sophistication carries in such proceedings is out of all proportion to Bermuda's geographic size – and rightly so. Other jurisdictions listen to Bermuda, because the island has been so highly regarded with respect to its proven regulatory structure, which the industry itself has had a strong voice in developing.

Bermuda, and especially the BMA, also recognises that as a premier international financial centre, we must have a global outlook. Long gone are the days when regulation could be viewed solely from the perspective of the home jurisdiction, and Bermuda takes its responsibility for international cooperation and transparency very seriously.

In addition to the 39 (and counting) Tax Information Exchange Agreements entered into by the Bermuda Government with other nations, the BMA also has in place multiple Memoranda of Understanding (MoU) with insurance regulators in other jurisdictions. Most recently and very notably, the BMA in August this year entered into a significant MoU with the US National Association of Insurance Commissioners (NAIC).

This will greatly enhance mutual assistance between the two regulatory bodies and follows the equally significant recognition of the BMA by the NAIC as a "Qualified Jurisdiction", effective 1 January this year.

Both developments represent a clear endorsement by the NAIC of the soundness of Bermuda's prudential standards and our commitment to principles of international regulatory cooperation.

All that said, by far the most significant and wide-ranging result of the BMA's global outlook has been its well-publicised quest for full third-country equivalence under Europe's Solvency II Directive.

Very early on in the development of the Solvency II regime, Bermuda recognised the crucial commercial importance of gaining full equivalence and was a first-mover when it came to putting the regulatory regime in place to achieve that. In very short order, the classification scheme for general business insurers was enhanced, the Bermuda Solvency Capital Requirements model was developed (and has undergone numerous refinements since), and the formal Insurance Code of Conduct was implemented.

Enhancements have since been made to the long-term insurer classification scheme, while Economic Balance Sheet provisions and transparency and disclosure standards for commercial insurers have also been implemented.

In characteristically pragmatic fashion, the BMA has made all of these regulatory changes to the commercial sector while continuing to protect the island's appropriately flexible captive insurer regime. As a jurisdiction, we created the concept of captive insurance and the captive sector remains a very significant part of our insurance industry.

It was therefore critical that the BMA ensured that the quest for Solvency II equivalence by the commercial sector did not adversely impact the captive market. Finding support in the overarching principle of proportionality, the BMA was successfully able to argue that for the captive and special purpose insurance sectors, full Solvency II-style regulation was not necessary.

As a result, Bermuda now has what amounts to a bifurcated regime, which is really just a continuation of the BMA's long-standing risk-based approach to regulation – applying the greatest level of regulation to those sectors that present the greatest risk profile, but keeping it simple for those that do not.

So, where does Bermuda stand now? At present, in Europe, Solvency II is just a couple of months away from taking effect after a (very) long road towards implementation. The European Insurance and Occupational Pensions Authority (Eiopa) has responsibility for, among other things, advising the European Commission on the regulatory status of those countries seeking equivalence. It has already undertaken several comprehensive reviews of Bermuda's existing regulatory regime and pointed out the aspects of the system that require further development in order for Bermuda to achieve equivalence.

In its most recent progress report, published on 4 September 2015, Eiopa provided an update on the remaining matters requiring attention. With typical efficiency, the BMA and the Bermuda legislature have been working diligently to implement those final changes without delay.

Final enhancements to the transparency and disclosure regimes for commercial insurers (publishing of Financial Condition Reports and preparation of GAAP-based financial statements, for example) and further refinements to the Economic Balance Sheet provisions and other prudential standards have gone through the industry consultation phase and are in the process of being drafted into the necessary legislation.

Other enhancements requested in prior reports by Eiopa have already been enacted and are either in force today or are simply awaiting the transitional date on which they are due to come into force (1 January 2016).

The BMA, meanwhile, is heavily focused on ensuring that the changes already made are brought into play smoothly and effectively, while awaiting a positive final recommendation from Eiopa that the European Parliament formally grant Bermuda its full equivalence status. The Bermuda insurance industry, for its part, is looking forward to having the BMA once again help the sector to remain at the head of the global pack. If history is a measure, Bermuda will undoubtedly achieve that.

This article was first published in Insider Quarterly Winter 2015.

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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