CD&P on Bermuda’s Long-Term Insurers
Conyers Dill & Pearman — the Bermuda-headquartered international legal firm specialising in company and commercial law — today [Feb. 18] issued an explanatory memorandum on the island’s new classification regime for long-term insurers and revised solvency requirements.
CD&P director David Doyle and associate Kent Smith address the five new classifications — which came into effect on December 31, 2010 — as well as changes to Bermuda’s solvency and disclosure regulations which prompted .the modified regime.
Introduction
Effective December 31, 2010, the Insurance Act 1978 was amended to provide for, amongst other things, a new classification regime whereby long-term insurers will be registered under one of five classifications.
Prior to this, an insurer carrying on longterm (essentially life) business was registered as simply a ʺlong-termʺ insurer.
Similar to the re‐classification of the Class 3 general business insurers in 2008, the underlying reason for expanding the classification system for long‐term insurers is to facilitate the introduction of a new solvency and disclosure framework which is currently being phased in for all of Bermuda’s commercial insurers.
New Classifications
Any person who is now seeking a licence to carry on long-term insurance business is required to be registered as either a Class A, Class B, Class C, Class D or Class E insurer and existing long-term insurers will have until September 30, 2011 to apply to be re-classified.
The new long‐term insurer classifications are as follows:
Class A ‐ A body corporate is registrable as a Class A insurer where it is wholly owned by one person and intends to carry on long-term business consisting only of insuring the risks of that person or it is an affiliate of a group and intends to carry on long-term business consisting only of insuring the risks of any other affiliates of that group or of its own shareholders. When determining whether a body corporate is wholly-owned by a person, the Authority may have regard to the beneficial as well as the legal ownership of such body corporate. This classification is essentially equivalent to a Class 1 general business insurer.
Class B ‐ A body corporate is registrable as a Class B insurer where it is wholly owned by two or more unrelated persons and intends to carry on long-term business not less than 80% of the net premiums written in respect of which will be written for the purpose of (i) insuring the risks of any of those persons or of any affiliates of any of those persons, or (ii) insuring risks which, in the opinion of the Authority, arise out of the business or operations of those persons or any affiliates of any of those persons. As with Class A insurers, when determining whether a body corporate is wholly-owned by a person, the Authority may have regard to the beneficial as well as the legal ownership of such body corporate. This classification is essentially equivalent to a Class 2 general business insurer.
Class C ‐ A body corporate is registrable as a Class C insurer where that body corporate has total assets of less than $250 million and is not registrable as a Class A or Class B insurer. It is expected that this classification will be treated as roughly equivalent to a Class 3A general business insurer (ie. as a small commercial insurer).
Class D ‐ A body corporate is registrable as a Class D insurer where that body corporate has total assets of $250 million or more, but less than $500 million, and is not registrable as a Class A or Class B insurer. It is expected that this classification will be treated as roughly equivalent to a Class 3B general business insurer (ie. as a large commercial insurer).
Class E ‐ A body corporate is registrable as a Class E insurer where that body corporate has total assets greater than $500 million and is not registrable as a Class A or Class B insurer. It is expected that this classification will be treated as roughly equivalent to a Class 4 general business insurer (ie. as a very large commercial insurer).
Notwithstanding the above qualification requirements, the Authority has discretion to register a long-term insurer under whatever classification it considers most appropriate after taking into account the nature of the intended relationship between the body corporate and its intended policyholders, the interests of those policyholders and of the public generally and the level of regulation which is applicable to the different classes of long-term insurer.
Application Process
Existing long‐term insurers may now submit an application for reclassification and are obligated to do so by the deadline of September 30, 2011. Any long‐term insurer
that fails to apply for reclassification by this deadline may have its registration cancelled.
The following documents must accompany a completed prescribed application form:
(i) original certificate of registration;
(ii) most recent audited financial statements;
(iii) unaudited management accounts; and
(iv) application fee ($500 in the case of Class A and Class B and $1,000 in the case of
Class C, Class D and Class E).
A guidance note describing the reclassification procedure has been published and is now available, together with the prescribed application form, on the Bermuda Monetary Authority’s website.
New Solvency Framework for Long-Term Insurers
Introduction
Effective December 31, 2010, the Insurance Act 1978 (Insurance Act) was amended to introduce, amongst other things, a new solvency framework for long‐term insurers.
Capital and Solvency Requirements
Under this new framework, long‐term insurers will have to meet a new prescribed minimum solvency margin which will vary depending on the category of their registration and their net premiums written and loss reserves (minimum solvency margin).
Currently, every long‐term insurer is required to maintain a minimum solvency margin whereby long‐term business assets exceed its long‐term business liabilities by not less than $250,000.
New Solvency Framework for Long-Term Insurers
Following reclassification, the minimum solvency margin will be computed in accordance with its new classification, as follows:
Class A
The greater of $120,000 or 0.5% of assets*
Class B
The greater of $250,000 or 1% of assets*
Class C
The greater of $500,000 or 1.5% of assets*
Class D
The greater of $4,000,000 or 2% of the first $250,000,000 of assets* plus 1.5% of assets* above $250,000,000
Class E
The greater of $8,000,000,000 or 2% of the first $500,000,000 of assets* plus 1.5% of assets* above $500,000,000
*Assets are defined as the total assets reported on an insurer’s balance sheet in the relevant year less the amount held in a segregated account.
The new minimum solvency margins will be phased in over a period of three years. The applicable solvency margins for the financial year ending in 2011 will be 50% and for the financial year ending in 2012 will be 75% of the amount specified above. For the financial year ending in 2013 and beyond, the applicable solvency margins will be the full amounts specified above.
Class E Long Term Insurers
Following reclassification, Class E insurers will also be required to determine two additional levels of regulatory capital, an enhanced capital requirement (ECR) and a target capital level (TCL). The ECR and TCL requirements are expected to be extended to Class D and Class C insurers beginning in 2012.
The ECR will be established by reference to either the Bermuda Solvency Capital Requirement model for long‐term insurers (which is a standard mathematical model used to determine an insurer’s capital adequacy) or an approved internal capital model. The ECR cannot be less than the relevant minimum solvency margin.
The TCL, which is not a capital requirement but rather an early warning indicator, is expected to be set at 120% of the ECR. Failure to maintain statutory capital and surplus in accordance with the TCL will likely result in increased regulatory oversight.
It is expected that a Bill will be presented shortly to the Bermuda Legislature which will, amongst other things, provide for the phasing‐in of the ECR and TCL capital requirements for Class E long‐term insurers over 3 years, similar to the phase‐in for the minimum solvency margins described above.
Other Insurance Act amendments affecting long-term insurers of note include the following:
Minimum Paid Up Share Capital
Presently, long‐term insurers are required to maintain paid up share capital of $250,000. Following reclassification, Class A insurers are required to maintain paid up share capital of at least $120,000 and Class B insurers, $250,000. Class C, Class D and Class E insurers are required to maintain paid up share capital of at least $500,000.
Reduction of Capital
A long‐term insurer may not reduce its total statutory capital by fifteen per cent (15%) or more, as set out in its previous year’s financial statements, unless it has received the prior approval of the Bermuda Monetary Authority (BMA).
Following reclassification, a Class E insurer seeking to reduce its statutory capital by fifteen per cent (15%) or more will be required to submit an affidavit signed by at least 2 directors (one of whom must be a Bermuda resident director if any of the company’s directors are resident in Bermuda) and its principal representative stating that the proposed reduction will not cause the company to fail to meet its relevant margins.
Filings and Penalties
Long-term insurers must prepare annual financial statements in the prescribed form (Statutory Financial Statements) which must be submitted to the Authority no later than four months after the end of the financial year to which the statements relate (unless an extension is granted). At the same time, every long‐term insurer must also file with the Authority an annual financial return in the prescribed form (Statutory Financial Return).
The maximum fine for late filings for Class A or Class B insurers will be BD$500 per week and BD$1,000 per week for Class C, Class D and Class E insurers.
