Conyers: Bermuda Insurance Update
International Bermuda law firm Conyers Dill & Pearman this week issued an advisory to its global clients on changes to the island’s regulatory regime for the insurance industry.
Compiled by Conyers lawyers David Doyle and Kent Smith, the 2011 update provides details on such recent developments as the new Bermuda Monetary Authority Insurance Code of Conduct, solvency requirements for life insurers and the island’s efforts to gain equivalence with Europe’s Solvency II regime.
Founded in Bermuda in 1928, Conyers now has offices across 11 countries in multiple time zones and jurisdictions.
The firm employs more than 150 lawyers advising on complex multi-jurisdictional legal issues.
The Update Appears In Full Below:
During 2011, there were a number of significant developments on the insurance regulatory front in Bermuda and this article briefly outlines some of these developments.
Insurance Code of Conduct
The Code came into force on July 1, 2011. The Bermuda Monetary Authority [BMA] developed the Code, taking into account core principles developed by the International Association of Insurance Supervisors. The Code does not set forth a
definitive set of rules of procedure and conduct applicable to all insurers, but rather contains general statements on the duties and standards to be complied with by all Bermuda insurers.The BMA now includes evaluation of an insurer’s compliance with the Code as part of its regular supervision and on‐site reviews of insurance companies. In addition, beginning in 2012, every insurer will be required to submit, as part of its annual statutory return, a statutory declaration confirming that it complies with the requirements of the Code. Failure to comply will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner.
Long-term insurers
A new classification scheme and solvency framework was introduced earlier this
year whereby all long‐term [life] insurers are now required to be registered as either a Class A, Class B, Class C, Class D or Class E insurers. Long‐term insurers must now 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]. The new minimum solvency margins will be phased in over a period of three years.Class E insurers are also 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 [BSCR] 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.
Prudential Standards to be extended to Class 3A InsurersContinuing its roll‐out of enhanced capital requirements for Bermuda’s commercial insurers, beginning in 2012, all Class 3A insurers will be subject to enhanced regulatory supervision. In connection with these changes, the BMA has advised that the trial run applying the new Bermuda Solvency Capital Requirement model for Small and Medium Sized Entities [BSCR‐SME] to Class 3A insurers has concluded and the Authority is now refining the model design in preparation for final implementation at the end of this year. Phased implementation of the BSCR‐SME will commence at year‐end, beginning with an ECR of 50% of the BSCR‐SME amount, subject to the existing minimum margin of solvency floor.
Group Supervision and Solvency Rules
New group solvency and supervision regulations will come into effect on December 31, 2011. Under these new regulations:
(i) every insurance group will be required to prepare and submit annually
group GAAP financial statements, a group statutory financial return and a
group capital and solvency return
(ii) the Board of the parent company of the group (“Parent Board”) must
establish solvency self assessment procedures for the group that factor in all
foreseeable material risks
(iii) the designated insurer must ensure that the group’s assets exceed the group’s
liabilities by the aggregate minimum margin of solvency of each qualifying
member and that available group capital and surplus is maintained at a level
equal to or in excess of the group’s ECR which is established by reference to
either the Group BSCR model or an approved group internal capital mode
(iv) the Parent Board must establish and effectively implement corporate
governance policies and procedures to ensure they support the overall
organisational strategy of the groupRules governing Group Eligible Capital will come into effect in 2013.
Solvency II Update
Bermuda has achieved significant progress with its insurance regulation
enhancements over the past several years. The European Insurance and
Occupational Pensions Authority [EIOPA] has recently published a report on its
preliminary Solvency II equivalence assessment of Bermuda. The report concludes that Bermuda’s regime for commercial general insurers (i.e. its Class 3A, 3B and 4 insurers) meets the criteria for Solvency II equivalence, with certain qualifications.The report notes the alignment of Bermuda’s regime with Solvency II principles in
key areas such as the scope of group supervision and the solvency regime for
groups. In terms of EIOPA’s qualifications, these cover supervisory enhancements
that are now in progress or are planned to come into effect by the end of 2012.
ConclusionAs noted, Bermuda has made impressive progress in terms of its Solvency II
equivalence but it is also recognised that as regulatory changes continue abroad,
more work may be required to keep pace with these developments.Bermuda must, however, continue as it has to carefully consider any further
regulatory changes in the context of Bermuda’s overall “book of business” to ensure
that any such changes are consistent with the risk‐based supervisory model that
Bermuda has adopted for its insurance market.
