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Risky Business A U.S. and Bermuda Under 40s (Re)Insurance Collaboration Inaugural Edition |
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Bermuda Regulation Review of 2008 and First Quarter 2009 By Katie Tornari
In January 2008, the Bermuda Monetary Authority (BMA) published its 2008 Business Plan highlighting the BMA’s goal to become internationally recognised as a leading risk-based regulator and this goal was reiterated in the BMA’s 2009 Business Plan. In this article, we look back at 2008 and the first quarter of 2009 and review what steps the BMA has taken to meet its goal, particularly in light of the challenging market conditions resulting from the global financial crisis. Mutual Recognition In order to achieve continued growth in an increasingly globalized market, the BMA identified that full mutual recognition, being treated as having equivalent regulatory standards to those in the European Union, was crucial as this had the potential to simplify access by (re)insurers in each market to the other market. Following the EU's proposal in 2007 for the introduction of the Solvency II Directive, in 2008 the BMA took a major stride towards mutual recognition by announcing significant changes to Bermuda's solvency and disclosure regulations. Insurance Amendment Act 2008 Prior to the Insurance Amendment Act 2008 being passed in Bermuda, the Bermuda Insurance Act 1978 required (re)insurers to meet a margin of solvency which had been calibrated based on the scale and class of the (re)insurer’s business, with higher premium and/or reserving levels, requiring more statutory capital and surplus. No account was taken of the fact that certain lines of business were inherently riskier than others. In July 2008, with the passing of the Insurance Amendment Act 2008, the Bermuda Solvency Capital Requirements (BSCR) were introduced to apply to Bermuda’s Class 4 (re)insurers and was intended to establish risk based capital adequacy standards for high impact (re)insurers. Unlike the earlier fixed minimum solvency margin requirements, the BSCR take into account the relative underwriting risks of different lines of insurance as well as a broad range of other risk factors including credit risk, equity risk, liquidity risk, reserving risk and catastrophe risk. (Re)insurers are allowed (subject to the BMA’s approval) to use their own internal capital models where they can establish that those models better reflect the inherent risks of their business. This approach owes much to the influence of the UK Financial Services Authority in the BMA's thinking. This legislation also provides for the reclassification of the Class 3 insurance sector, which included firms ranging from captives writing a limited amount of third party business to large commercial (re)insurers. The reclassification focused on the respective risk profiles of the Class 3 companies and introduced two new classifications, Class 3A (small commercial insurers) and Class 3B (large commercial insurers) and a new category for insurance purpose vehicles to be known as “Special Purpose Insurers” (SPIs). This allows the BMA to undertake a more detailed analysis in identifying the regulatory needs in relation to the different types of (re)insurers using its risk-based regulatory approach. The amendments to the Insurance Act 1978 have been supplemented with the following amendments: Insurance Accounts Amendment Regulations 2008 These Insurance Accounts Amendment Regulations, which came into effect on 31 December 2008, amend the Insurance Accounts Regulations 1980 and set out the statutory financial accounting requirements for the purposes of BSCR for Class 4 (re)insurers. The amended statutory financial accounting requirements are more onerous and involve the submission of more detailed balance sheets (including detailed information about specific assets and distinguishing assets that are attributable to affiliates) and income statements to the BMA. Insurance Returns and Solvency Amendment Regulations 2008 These Insurance Returns and Solvency Amendment Regulations, which also came into effect on 31 December 2008, amended the Insurance Returns and Solvency Amendment Regulations 1980. They made a general amendment to include references to Class 3A and Class 3B (re)insurers and a minimum margin of solvency for the new class of SPIs, and introduced a requirement for SPIs to submit a special purpose solvency certificate. These regulations were accompanied by the issuance of the Insurance (Prudential Standards) (Class 4 Solvency Requirement) Order 2008. The Order sets out the prudential standards that Class 3 (re)insurers must comply with when submitting a Capital and Solvency Return. Response to the Global Financial Crisis The Bermuda market has carefully monitored the situation since the onset of the crisis and, in particular focused on investment funds, banks and the insurance market, the areas most affected by the crisis. In the insurance sector, the BMA has taken a proactive role and has undertaken surveys to assess the companies' exposure in both investment portfolios and underwriting. The result of this was a focus on the financial guaranty firms who were the most affected. Some success has been achieved in helping these companies recover. However, the BMA has recognised that there is still work to do. In 2008, the BMA collaborated with the New York State Insurance Department (NYSID) in relation to a number of firms within the financial guaranty sector impacted by sub-prime and matters related to AIG. This collaboration underscored the need to ensure that regulators could co-operate quickly and efficiently in the global insurance market and, as a result, the BMA and the NYSID signed a memorandum of understanding (MoU) on 29 September 2008. According to paragraph 2 of the MoU, its purpose is to facilitate a formal basis for consultation, cooperation and coordination between the two regulatory bodies. The MoU allows for the exchange of information relevant to each authority's supervisory, regulatory and examination responsibilities. Each authority can assist the other in investigative work regarding companies and persons engaged in insurance business, including, questioning, taking testimony and conducting inspections and investigations. In 2009, the BMA also signed a MoU with the Luxembourg Commissariat aux Assurances, Luxembourg’s regulator of the insurance sector, which provides direct cooperation between Bermuda and Luxembourg. This aims to facilitate the exchange handling and protection of information between the BMA and the Commissariat and, where appropriate, investigative assistance with respect to regulated entities. The Year Ahead On 15 January 2009, the BMA published its Business Plan for 2009. This year, the BMA will: · continue to focus on the management of the financial crisis (in the same manner as in 2008, using soft tactics such as market surveys, stress tests and on-site reviews to identify firms for close monitoring); · continue progress towards international mutual recognition for Bermuda (with a focus on EU and US markets); · implement new money laundering standards (with a focus on on-site reviews and taking enforcement action as necessary); and · continue the improvement of operational efficiency within the market (by publishing service standards with regard to particular types of regulatory transactions rather than generally across the market). In its Business Plan, the BMA also proposed to publish guidance on the regulatory standards for SPIs and to start a longer term project to review parts of the Insurance Act 1978 which require updating. First Quarter of 2009 In the first quarter of 2009, the BMA has continued to work towards achieving the goals it set for 2008 and 2009 and has published discussion papers on the following: Proposed Enhancements to Insurance Supervision and Enforcement Powers: The BMA is reviewing its enforcement powers in insurance, particularly in light of the current events in the financial markets, to strengthen regulatory powers. The BMA’s considerations include: (a) developing an express power for the BMA to publicize enforcement action it has taken against an entity which the BMA believes would have the potential for significant deterrence; (b) whether the BMA should seek a power to ban individuals from acting in roles in the industry for a specified period; and (c) whether the BMA should have the power to impose a financial penalty on an individual or company and sue through the civil court system. Group Wide Supervision: The adoption of group-wide supervision has emerged in light of the credit crisis to help ensure that groups are effectively regulated and that they conduct their operations in a prudent and financially sound manner. The BMA proposes to apply its group-wide supervision regime to Class 4 and Class 3B insurers that form part of a financial group or mixed conglomerate by the fourth quarter of 2011 because of their higher risk profile. Part of the BMA’s intention was to ensure that Bermuda’s standards were broadly equivalent to international standards being developed in this regard. However, in light of group supervision being omitted from Solvency II, Bermuda may end up with a different regime. Roadmap to Mutual Recognition: In working towards mutual recognition, the BMA is concentrating its efforts on achieving equivalence with Solvency II in Europe. However, the BMA is also monitoring other regimes and, in particular, aims to ensure equivalence under the US Reinsurance Modernisation Initiative. The regime which the BMA is seeking to create has three core components: (a) capital adequacy whereby capital requirements will take into account all aspects of risk (including group risk) and the quality of the capital supporting the business; (b) governance and risk management which reflects the integration of risk and capital management; and (c) transparency and disclosure from the regulator, the firms themselves and the groups the BMA supervises. SPIs: The BMA has set out guidance in relation to the BMA's licensing and ongoing supervisory activities associated with SPIs. The paper aims to help facilitate a prudent application and approval process of these vehicles. The BMA’s Business Plan for 2009 set out initiatives to strengthen the BMA’s ability to respond to the financial crisis as it moves into a new phase and was designed to chart a course to ensure that Bermuda succeeded as a leading financial market supported by a leading risk-based financial regulator. In the first Quarter of 2009, the BMA has demonstrated its commitment to succeed in this regard and continues to take active steps to ensure it has in place a leading risk-based supervisory framework that recognises both the differing constituents of the Bermuda market as well as developing international regulatory standards.
This article first appeared in Edwards Angell Palmer & Dodge LLP’s Insurance and Reinsurance Review (March 2009). Since its first publication this article has been amended to reflect recent legal developments.
About the author: Katie Tornari is a Senior Associate in the Insurance and Reinsurance Department at Marshall Diel & Myers (MD&M). MD&M entered into a cooperation agreement with Edwards Angell Palmer & Dodge UK LLP (EAPD) effective 3 March 2008 and Katie joined MD&M from EAPD in March 2008 to assist them in developing their insurance and reinsurance practice. Katie works on a range of complex insurance and reinsurance disputes. Katie is also the Education Officer of the Bermuda Under 40s Re/Insurance Group. If you have any questions, you can contact Katie at Katie.Tornari@law.bm or on +441 298 1216. |
