Bermuda Enhances Insurance Solvency Regulations

The Bermuda Monetary Authority announced today what it called significant changes for Bermuda’s solvency and disclosure regulations for insurers.

It said the revisions will help ensure Bermuda achieves recognition as having regulatory standards equivalent to those in Europe’s Solvency II Directive.

The Authority also announced new measures to facilitate special purpose vehicles (SPVs).

“I’m pleased to say that the developments announced today mean we’re well on track to achieving our objective of achieving equivalence, or mutual recognition status, in Europe and elsewhere,” said Matthew Elderfield, chief executive officer of the Authority.

“Bermuda is now one of the countries at the front of the pack in terms of preparing for Solvency II,” he commented.

With the recent passage of the Insurance Amendment Act 2008, the Authority said it will now introduce, among other new and expanded regulatory initiatives, the Bermuda Solvency Capital Requirement (BSCR), an enhanced solvency regime that will apply to Bermuda’s Class 4 (re)insurers, its largest insurance companies.

“The BSCR will assist us to build on Bermuda’s existing solvency regime by establishing risk-based capital adequacy standards for high impact insurers,” Mr. Elderfield said.

“This will allow for a more risk-sensitive approach to setting solvency requirements for Bermuda’s insurers, in line with international developments regarding capital adequacy such as Solvency II,” he added.

“Implementing the BSCR will also help with the Authority’s transition to recognizing companies’ internal economic capital models,” said Mr. Elderfield.

“Permitting the use of internal models for our (re)insurance companies to determine appropriate capital levels for their business, subject to review and approval of each model by the Authority, is again consistent with developments in international insurance regulation,” he noted.

Other initiatives facilitated by the new provisions in the amended legislation include the publication of financial statements submitted to the Authority by Class 4 companies, under new reporting requirements for these high impact insurers, using Generally Accepted Accounting Principles (GAAP).

“These new provisions enable us to publish GAAP financial statements, which will result in enhanced standards for disclosure for Bermuda’s Class 4 insurers, in line with international standards relating to transparency in the industry,” Mr. Elderfield said.

The legislation also facilitates the re-classification of Bermuda’s Class 3 insurance sector, which includes a large number of firms with a wide range of characteristics—from captive insurers writing a limited amount of third-party business to large, purely commercial (re)insurers.

“This means we’re establishing further subcategories within the Class 3 group, based on their respective risk profiles,” Mr. Elderfield explained.

He said, “We will be able to refine our application of risk-based supervision to these firms further, to ensure they receive the level of oversight that is appropriate to the nature of their business.”

The reclassification, Mr. Elderfield noted, also introduces a new category of ‘Special Purpose Insurer,” focused on fully collateralized SPVs that are established to conduct specific insurance transactions (most typically asset-backed securitization transactions).

The new classification, it was explained, will make it less costly for SPVs to be established in Bermuda.

“The changes agreed for SPVs will help maintain Bermuda’s position as a leading insurance market,” Mr. Elderfield said.