Analyzing Bermuda’s Prudential Solvency Regime

Episode Summary

In the second episode in Skadden’s yearlong podcast series on global prudential solvency requirements, host Robert Chaplin and colleague Abraham Alheyali discuss the regulatory regime in Bermuda, a global center for insurance and reinsurance. More than 30 major firms underwrite from the country, and it is the largest supplier of catastrophe reinsurance to U.S. insurers. Rob and Abraham discuss the Bermuda Monetary Authority’s (BMA’s) regulatory approach toward different types of insurers and reinsurers, the four key concepts in Bermuda’s prudential regime, various requirements for capital holdings and investments, and how the insurance industry’s growth and increasing sophistication will likely lead to future regulatory changes.

Key Points

• The History of Insurance in Bermuda: More than 30 major international insurance and reinsurance firms underwrite from Bermuda, making it a global center in the industry, known for its innovative, business-friendly and entrepreneurial approach.
• Key Concepts: The episode breaks down the Bermuda solvency regime’s four key concepts: the Minimum Margin of Solvency, the Bermuda Solvency Capital Requirement, the Enhanced Capital Requirement and the Target Capital Level.
• Private Equity Insurers: The Bermudian market has experienced significant involvement from private equity and alternative asset manager-backed (re)insurers. This trend is expected to continue as Bermuda has emerged as a favored jurisdiction for PE-owned insurers due to a combination of regulatory flexibility, strategic location, and a robust financial ecosystem.
• Regulatory Changes: With the market's growth and increasing sophistication, the episode covers potential regulatory evolution ahead as the BMA adapts to new challenges.

Voiceover (00:02):
From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.

Rob Chaplin (00:19):
Welcome back to the Standard Formula Podcast. Today we’ll be discussing the Prudential Solvency Regime in Bermuda, a crucial topic for anyone involved in the insurance industry. This episode is the second in our new year-long podcast series on global prudential solvency requirements, which will form the basis of our forthcoming publication, the Encyclopedia of Prudential Solvency.

(00:44):
Joining me today to discuss the Bermuda Capital requirements is my colleague Abraham Alheyali. It’s great to have you here to speak about this important topic. We’re enormously grateful to our good friends at ASW Law in Bermuda for their review of the script for this podcast. Abraham.

Abraham Alheyali (01:02):
Thanks. Rob. Bermuda is a global center for insurance and reinsurance having established itself in the late 1960s and early ‘70s as a leader in development and regulation of captive insurers and for its innovative business-friendly and entrepreneurial approach.

(01:20):
Today, more than 30 major international insurance and reinsurance firms underwrite from Bermuda. The Association of Bermuda Insurers and Reinsurers or ABIR notes that Bermuda is the largest supplier of catastrophe reinsurers to US insurers. Bermuda therefore plays a part in the US and international reinsurance markets. Bermuda’s insurance and reinsurance industry is overseen by the Bermuda Monetary Authority or the BMA. The BMA is an independent non-governmental body established by statute and is responsible under the Bermuda Insurance Act 1978 or the Insurance Act for the licensing and supervision of insurance and reinsurance companies and insurance-related activities carried on in Bermuda. The Insurance Act sets out the framework for regulating those carrying on insurance businesses in and from Bermuda.

(02:19):
The BMA has the power to make secondary legislation such as rules or regulations, which will supplement the Primary Insurance Act as well as create other ancillary regulatory directives such as statements of principle. The BMA’s regulation of commercial insurers seeks to comply with international standards and best practices in insurance regulation and supervision. There’s increasing development in this area internationally, as we spoke about in our last podcast with respect to the International Association of Insurance Supervisors or IAIS’s introduction of the Insurance Capital Standard or ICS.

(03:00):
Bermuda is one of only two non-EU jurisdictions, the other being Switzerland, whose regulatory regime for commercial insurers has been recognized as being fully equivalent with the Solvency II directive. Bermuda achieved full equivalence in 2016. Solvency II equivalence for third countries means a non-EU jurisdiction has an insurance regulatory regime that is regarded as achieving the same outcomes as those determined under the Solvency II framework.

(03:28):
It enablers reinsurers and insurance groups from third countries that’s not the EU to do business in the EU in certain respects as if they were EU-domiciled entities. In addition, it strengthens the level of trust and cooperation between international insurance supervisors. In turn, this facilitates cross-border transactions. It allows Bermuda-based insurers to access international markets with comparatively less regulatory friction as compared against insurers based in jurisdictions who don’t benefit from equivalent status. Bermuda also benefits from its status as a qualified jurisdiction, a status granted by the US body, the National Association of Insurance Commissioners or NAIC. This status allows Bermudian insurers to seek NAIC certification to better access the US insurance market.

(04:19):
Along with being highly regarded from a regulatory perspective, Bermuda’s favorable tax regime allows reinsurers to operate with greater capital efficiency. The island’s history of innovation and insurance markets, along with the ease of doing business there, also makes it a popular jurisdiction. Consistent with its commitment to compliance of international standards, Bermuda has recently introduced corporate income tax legislation for businesses meeting certain income thresholds.

(04:47):
Rob, now that we know a little bit about this history of Bermuda and the nature of its regulatory regime, can you tell us about the BMA’s approach to different types of insurers and reinsurers and four key concepts in Bermuda’s prudential regime?

Rob Chaplin (05:00):
Yes, there are a number of different types of insurers and reinsurers in Bermuda who aren’t all regulated in the same way. Bermuda splits its approach to the regulation of insurers and reinsurers into two. The first approach deals with limited purpose insurers. The second deals with commercial insurers, limited purpose insurers include captives, special purpose insurers, or SPIs and collateralized insurers or CIs. The particular requirements that an insurer will have to comply with will vary depending on the classification and the nature, scale and complexity of that insurer. These different types of insurers and reinsurers have different prudential requirements in accordance with the principle of proportionality, which starts with the Bermuda class system when licensing insurers. The purpose of the class system is to have lighter regulation for firms such as single captives who insure only the risks of the parent group while appropriately increasing the regulatory requirements for firms that underwrite broader risks, with the most stringent requirements imposed on commercial reinsurers, writing more than 50% unrelated or third-party risk.

(06:16):
The class system regulates in the general insurance space classes one to three as captive insurers and classes, 3A, 3B, and class 4 as commercial insurers and classes A and B in the long-term space as captives and classes C, D, and E as commercial reinsurers. The requirements become higher as you go through the insurance class gears.

(06:44):
To unpack how the Bermudian regime applies to different types of insurer, a good place to start is to consider four of the key concepts of the regime, the Minimum Margin of Solvency or MSM, the Bermuda Solvency Capital Requirement or BSCR, the Enhanced Capital Requirement or the ECR, and finally, the Target Capital Level or TCL.

(07:10):
As its name suggests, the MSM is essentially a regulatory capital flaw, which can vary depending on what regulatory class the particular insurer falls under and its net written premiums. In essence, it’s a minimum amount of capital that insurers must always maintain regardless of the outcome of their more risk-sensitive calculations such as the BSCR. The requirements for the MSM for captive insurers are set out in the Insurance Returns and Solvency Regulations 1980 and for commercial insurers are set out in the Insurance Accounts Rules 2016.

(07:46):
While the MSM applies to all insurers in respect to commercial reinsurers, we also need to consider the BSCR, ECR, and TCL. The BSCR is the BMA’s risk-based capital model developed specifically to enhance its capital adequacy framework for the insurance sector. The BSCR takes into account an insurer’s risk profile, taking into account the inherent risk and complexity of the different lines of business it underwrites. There are differing BSCR models published by the BMA depending on the class of insurer or reinsurer. We will look in detail later as to how it’s calculated. The EU and UK equivalent of the BSCR is the standard formula solvency capital requirement.

(08:34):
Next, the ECR. The ECR represents the minimum level of economic capital and surplus that an insurer or reinsurer must have. The ECR is calculated either according to the appropriate BSCR model or an internal capital model approved by the BMA. The ECR of an insurer is calculated by reference to the insurer’s BSCR and is calculated at the end of the insurer’s financial year. The ECR amount must equal to or exceed the MSM. In practice, the BSCR will almost always be greater than the MSM and that will generally drive the ECR. The ECR is important to the BMA as it serves as an early warning indicator of a firm’s solvency. The BMA expects insurers and reinsurers to operate at or above what is known as a target capital level or TCL, which exceeds its ECR.

(09:31):
While not a capital requirement as such, as it’s not specifically prescribed in legislation, the BMA requires insurers and reinsurers to have a TCL of at least 120% of its ECR. In practice, this percentage is usually much higher, for example, 150% or more often not least to insure a sufficiently good credit rating to attract business. This is the equivalent of risk appetite in Europe.

(09:58):
Although this might not in itself involve any technical regulatory violation, a failure by an insurer to maintain a level of capital meeting its TCL obligations may result in increased regulatory oversight such as additional reporting requirements and enhanced monitoring, and conceivably the introduction of constraints such as not paying any dividends without prior regulatory approval. Furthermore, the BMA is also likely to require the submission of a remediation plan to restore capital above the TCL.

(10:31):
Abraham, now that we know about the Bermudian approach and these four key concepts, can you provide some detail as to the components of the BSCR and recent changes to the model?

Abraham Alheyali (10:44):
Certainly, Rob. The BSCR model calculates a risk-based capital measure by applying capital factors to capital and solvency elements, including investments and other assets, operational risks, lend long-term insurance risk to establish an overall measure of capital and surplus for statutory solvency purposes. The capital factor establish for each risk element when applied to that element produces a required amount. The individual capital amounts generated for each risk element excluding operational risks are then aggregated.

(11:18):
There are different categories of risk charge. Some notable ones include fixed income investment risk equity investment risk, which includes real estate investment risk, interest and liquidity risk, concentration risk, catastrophe risk, and foreign exchange risk. The BSCR calculation involves multiplying the prescribed capital factor by a specified exposure blend. This figure is further modified to account for insurer-specific operational risk and capital add-ons as evaluated by the BMA ultimately resulting in the final BSCR for an insurer.

(11:54):
In addition, an insurer’s available statutory capital and surplus divided by the BSCR gives the BSCR ratio. An insurer’s available statutory capital and surplus divided by the ECR gives the ECR ratio. The BSCR and ECR ratios are other tools that the BMA uses to assist it to evaluate the financial strength of an insurer. The BSCR was updated as a result of a regulatory reform in Bermuda further to the BMA’s second consultation paper issued on the 28th of July 2023 on enhancements to the regulatory regime for commercial insurers known as CP2. CP2 applies to commercial insurers and insurance groups. The reforms came into force on the 31st of March 2024. .

(12:42):
In this regard, at least, there are three main reforms under CP2. First, increased risk sensitivity related to lapse and expense risks under the BSCR framework. Second amendments to the property and casualty risk category intended to better capture man-made risks. Third, CP2 brought in changes to allow insurers to apply to the BMA to make adjustments to their BSCR. Regarding lapse risk, before CP2, lapse and expenses risks fell within long-term other insurance risk charge of the BSCR framework. There was no explicit identification of these two risk components.

(13:24):
The BMA changed this to separate the other insurance risk charge into lapse and expense risk components. This change will better reflect these risks and improve transparency of the BSCR standard approach. With respect to the property and casualty catastrophe risk charges, the BMA amended the BSCR catastrophe risk category to introduce a dedicated man-made catastrophe risk subcategory. This subgroup comprises catastrophe scenarios for terrorism, credit and surety, marine situations, and aviation reflecting market developments.

(14:01):
The third transfer reform is for insurer requested adjustments to the BSCR. This amended the BMA’s section 6D framework referring to section 6D of the insurance act. Insurers are allowed to request certain adjustments to their BSCR. As mentioned, the BSCR is often used to calculate the ECR, which in turn is used to determine the target capital level. The next step is ensuring you have enough capital to cover the target capital level. It should be noted that not all capital that backs the capital requirement receives the same regulatory treatment.

(14:35):
Rob, please, would you walk us through the various capital tiers?

Rob Chaplin (14:39):
Absolutely, Abraham. Yes. Not all sources of capital are equal. An insurer’s total available capital is not treated as a single homogenous pool. The BMA distinguishes among different tiers of capital based on quality, permanence and loss absorption capacity. The rules setting out these capital tiers for re-insurers are set out in the Bermuda Insurance Eligible Capital Rules of 2012. The highest quality is tier one followed by tiers two and three. This is similar to the approach under Solvency II. This tiered approach ensures that capital of differing quality is utilized appropriately so that insurers have sufficient capital to absorb losses and continue operations even in adverse conditions.

(15:27):
Tier one. Tier one is the most reliable and the highest form of capital. It’s available to absorb losses at any time, including during normal operations, runoff, winding up and insolvency. Tier one capital has amongst others the following characteristics, fully paid up, unencumbered and a maturity of no less than 10 years from the date that it was issued. Examples include fully paid common equity, share premium and accumulated surplus. The BMA requires a significant portion of an insurer’s regulatory capital to be composed of tier one.

(16:05):
Tier two. Tier two includes instruments that are slightly lower in quality than Tier one, but still offer loss absorbing capability and policyholder protection. Examples include qualifying hybrid instruments like preference shares, unpaid callable common shares, and subordinated liabilities. Although it can count towards meeting overall capital requirements, its use is always capped relative to tier one.

(16:33):
Tier three. Tier three shares some characteristics with tiers one and two, but is generally of lower quality. Examples include short-term approved letters of credit and parental guarantees. Use of tier three capital is generally subject to strict limits. Certain insurer’s capital base isn’t overly reliant on instruments that may not be available to absorb losses during stress. The BMA permits specific percentages of each capital tier, largely that of tiers one and two to be included in the capital pool representing an insurer’s ECR and TCL.

(17:12):
These percentages differ based on the insurer’s specific regulatory classification. For example, class four insurers, which is the category that captures many large commercial insurers are required to maintain at least 60% of their ECR in the form of tier one capital. The amount of Tier two capital is capped 66 point two-thirds of the tier one capital, and the amount of tier three capital is capped at 17.65% of the aggregate sum of tier one and two capital.

(17:46):
If an insurer’s capital structure is heavily towards lower quality capital, tier two or three, the BMA may view this as a sign of weakness and require corrective action. In short, the hierarchical structure of capital tiers provides a clear framework for the quality and characteristics of capital instruments. This structure helps the BMA assess the financial health of an insurer more accurately. It also ensures that higher quality capital is prioritized in meeting solvency requirements, providing greater assurance of an insurer’s ability to withstand financial shocks.

(18:25):
Abraham, could you tell us how these capital requirements apply to groups of insurers please?

Abraham Alheyali (18:31):
Sure, Rob. As discussed earlier, an individual insurer is required to calculate its BSCR and ECR after taking into consideration risk categories and solvency requirements. Groups of insurers have to additionally aggregate the group’s capital from all relevant entities. This isn’t a straightforward task that’s a designated insurer. That is the entity responsible for reporting on behalf of the group, must make sure not to double count any intra-group loans or receivables.

(19:00):
Calculating the group’s BSCR is similarly complicated. The designated insurer has to determine the group’s overall risk exposure by aggregating risk factors from each relevant group member. The group’s final solvency ratio is calculated as the group’s consolidated available capital divided by the group’s BSCR. Under the group’s supervision framework, the BMA requires that an insurance group’s total available capital and surplus be sufficient not only to meet each member’s individual requirements, but also to cover the group’s overall risk profile.

(19:34):
Bermudian insurance groups must hold eligible capital that is at least equal to its group’s ECR. The group ECR is determined by aggregating the ECRs of individual members calculated using the standard BSCR formula or an improved internal model adjusted for intra-group transactions and the fact that some capital may not be fungible across group entities. The goal is to ensure that on a consolidated basis, the group is able to absorb losses across its entire portfolio.

(20:05):
In addition to the risk-sensitive ECR, the group supervision rules require that the value of the group’s statutory economic capital and surplus exceed the aggregate of the minimum solvency margins of each member. In practice, this means that the capital available at the group level must cover the individual solvency requirements of various entities within the group. With adjustments made based on the parent company’s percentage, shareholdings and entities, it does not have full control.

(20:34):
Rob, are there any additional ancillary regulatory requirements worth mentioning at this point for insurers and groups in addition to the capital requirements?

Rob Chaplin (20:44):
Thanks, Abraham. Based on an insurer’s profile and in addition to the capital requirements, the BMA may also impose additional capital requirements, restrict dividends, require capital maintenance agreements and mandate liquid contingent capital resources and liquidity management tools. As is the case with other prudential regimes, the BMA also requires certain information from insurers under its regulatory oversight. Bermudian insurers must file statutory financial statements, financial returns, and a capital and solvency return within four months after the end of the financial year.

(21:25):
Bermudian insurers must also prepare and submit a financial condition report. According to the BMA. The financial condition report is an opportunity for an insurance group to describe its business to the public in relation to the insurance group’s business model whereby the public may make an informed assessment on whether the business is run in a prudent manner. This report must be published on the insurer’s website within 14 days of being filed with the BMA. Unlike the financial condition report, the statutory financial statements, the financial returns and the capital insolvency return aren’t available for public inspection.

(22:03):
Abraham, we’ve talked a bit about how the BMA expects capital to be held, but can you tell us more about how capital can be invested?

Abraham Alheyali (22:12):
Thanks, Rob. Bermuda’s rules are designed with modeling and flexibility in mind, allowing insurers to adapt to a variety of market conditions and business models. The flexibility comes across through a number of key concepts. The first is that the BMA allows insurers to tailor their investment strategies to their unique risk profiles. Rather than imposing rigid and prescriptive asset allocation strategies, the investment rules encourage investing in assets that allow the insurer to meet its overall solvency and capital requirements.

(22:40):
One key concept here is the Prudent Person Principle or the PPP. This is a concept that you can find in other regimes like Solvency II. The Prudent Person Principle is outlined in the BMA’s insurance code of conduct. The principle requires an insurer in determining the appropriate investment strategy and policy may only assume investment risks that it understands and can properly identify, measure, respond to, monitor, control, and report on, while also taking into consideration its capital requirements and adequacy, short-term and long-term liquidity requirements and policyholder obligations.

(23:19):
Further, the insurer must ensure that investment decisions have been executed in the best interests of its policyholders. Market conditions may also necessitate special care for other more risk-sensitive assets, such as real estate equity, concentrated lower investment-grade, corporate positions, and exposure to highly correlated assets. The insurance code of conduct or the code and the Insurance Group Supervision Rules of 2011 requires insurers to implement the PPP as an integral part of their risk management framework. Compliance of the PPP shall continue to be considered on a case-by-case basis notwithstanding the provisions of the rules.

(24:00):
The BMA has recognized that what may be prudent for one insurer may not be prudent for another, and that the application of the PPP is likely to give rise to a range of reasonable investment strategies. The BMA places the responsibility on senior management to ensure that the insurer complies with the PPP.

(24:19):
Rob, there have been some recent developments with respect to the PPP. Is that right?

Rob Chaplin (24:24):
Yes, Abraham. The BMA has been actively updating its guidance on the PPP in respect to commercial insurers most recently publishing a consultation paper on 4, December 2024 entitled the Proposed Instructions and Guidance on the Application of the Prudent Person Principle. That paper provides additional guidance in respect to the following areas of application relevant to the PPP, widened areas for consideration within an investment strategy adhering to the PPP, recommendations with respect to governance, adherence to the PPP in the context of outsourcing of investment-related services, matching assets to liabilities, risk concentration accumulation and diversification, complex and non-publicly traded assets, affiliated, related and connected party assets, the commercial insurer solvency self-assessment, and group solvency self-assessment, and the use of derivatives and other financial instruments.

(25:28):
The proposals are intended to come into effect on the 1st of July 2025.

Abraham Alheyali (25:33):
What about insurers being able to discount their liabilities on the basis of the return on the assets they hold?

Rob Chaplin (25:39):
Yes. That’s a key concept for life businesses. In Bermuda life and annuity insurers may discount their insurance liabilities, which are inherently more asset intensive and long-term using the discount curves prescribed by the BMA or an alternative asset liability management or ALM approach called the Scenario Based Approach or SBA. The SBA, like the Solvency II matching adjustment, allows the usually higher credit adjusted return on the actual assets held to be used to discount particular types of liability. This is crucial for life companies.

(26:16):
To be approved to use or continue to use the SBA, firms must meet specific conditions such as demonstrating that their liquidity risk management plans align with BMA specifications and conducting detailed liquidity stress tests. At a minimum liabilities should be matched with suitable assets that produce predictable and stable cash flows. Where a mismatch exists, the SBA assigns an explicit cost by running the calculation through eight alternative interest rate scenarios and selecting the worst of the eight scenarios to determine the Best Estimate Liability or BEL.

(26:54):
To mitigate the consequences of lapse risk, the BMA has implemented a more intrusive supervisory approach and standard. The BMA has noted that the recent enhancements to the SBA, which approach is commonly used by PE firms, will likely have a significant quantitative impact on the Bermuda market. The BMA has introduced new requirements for insurers to seek approval to use non-publicly traded assets and affiliated investments in the SBA. The BMA is bolstering SBA supervision with additional resources to analyze reported data, ensuring the adequacy of technical revisions set up by supervised firms.

(27:36):
Now that we’ve talked about some considerations regarding investments, why don’t we go over private equity investment in this space? Abraham.

Abraham Alheyali (27:44):
Thanks, Rob. The Bermudian market has experienced significant involvement from private equity and alternative asset manager-backed reinsurers. This trend is expected to continue. Bermuda has emerged as a favorite jurisdiction for so-called private equity or PE-owned insurers due to a combination of regulatory flexibility, strategic location, and a robust financial ecosystem. There are onshore regulatory concerns about this model which have been echoed in Bermuda. The BMA has recognized what are perceived to be the unique risks associated with PE-owned insurers such as complex structures, conflicts of interest, and higher proportions of illiquid assets.

(28:24):
The BMA published a now much-discussed paper in December 2023 called Supervision and Regulation of PE-Insurers in Bermuda or the December Paper, clarifying the authority’s position on oversight of reinsurers operating and licensed in Bermuda that are owned or supported by private equity and alternative asset managers. This paper may be seen as a response to concern with the model while also supporting and protecting the Bermudian insurance industry.

(28:54):
In addition, as mentioned earlier in the context of the BSCR, the BMA released a consultation paper in July 2023 called Proposed Enhancements to the Regulatory Regime for Commercial Insurers or CP2, which led to reforms. The practical effect of CP2 will depend on the company concerned, but for many PE-insurers writing life insurance liabilities, the reforms have significant effects. The BMA’s regulatory focus on PE-insurers is notable due to the potential impact on transaction timelines, deal and group structures, capital and collateral requirements, costs, and potentially increased administrative responsibilities such as the requirement to get approval for block trades.

(29:39):
The market’s growth, pressure from onshore regulators and increasing sophistication will likely lead to further regulatory evolution as the BMA adapts to new challenges and considers industry feedback. Rob, can you tell us a little bit about other regulatory changes?

Rob Chaplin (29:56):
Thank you, Abraham. The Prudential Solvency Rules are under continuous revision by the BMA to ensure that best market practices are being observed by insurers in the Bermudian market. In April 2024, the BMA issued the insurance Prudential Standards Recovery Plan Rules 2024, also called the Recovery Rules, which are set to take effect on the 1st of May 2025. In September, 2024, the BMA held a workshop with the industry to discuss its expectations in relation to recovery planning. In a follow-up letter released on the 22nd of November 2024, the BMA summarized its expectations for recovery planning and provided practical examples of the challenges re-insurers face when drafting and implementing a recovery plan. The Recovery Rules provide guidance as to whether an insurer has to prepare a recovery plan.

(30:53):
The BMA will consider the following, first, whether the insurer carries on domestic business, second, whether the insurer has a three-year rolling average total of assets of at least $10 billion, third, whether the insurer has a three-year rolling average total gross written premiums of at least $5 million and fourth, whether the insurer is subject to enhanced supervisory monitoring by the BMA or any relevant supervisory authority.

(31:24):
If the BMA does decide that an insurer needs to have a recovery plan in place, the BMA will determine the scope and requirements of the plan taking into account amongst other things the size or market share of the insurer, business model and risk profile of the insurer. Any recovery plan must contain amongst other things, a description of the insurer, the nature of the insurer’s business, a description of the insurer’s governance policies and the various methods to be used to recover from stressed situations. These recovery plans must be reviewed at least once every three years or when there is a material change to the insurer’s strategy, business or risk profile, or in its financial position. Additionally, the recovery plan must be filed with the BMA within 30 days of its update.

(32:15):
Abraham, I understand there’s also been some proposed changes to public disclosure requirements by the BMA.

Abraham Alheyali (32:21):
Yes, indeed there have. The BMA issued a consultation paper in December 2024 on proposed enhancements to the public disclosure regime, public disclosure of assets and liabilities for commercial long-term insurers. This consultation proposes to, amongst other things, publicly disclose the assets and liabilities of all Bermudian insurers caught by the paper. This is in response to a global trend where the life and immunity insurance sector has increased its exposure to illiquid hard-to-value assets that are not publicly traded.

(32:54):
To address the risks involved, the BMA has intensified its oversight of Bermuda’s long-term insurers, ensuring that these risks are well understood, managed, and governed appropriately. In this context, the application of the PPP plays a critical role. For long-term insurers this means that they must ensure that their investment decisions have been executed in the best interests of their policy holders under both normal and stress conditions. For assets, the disclosed information will be presented on a consolidated basis. It will encompass all assets held by the long-term insurer, including but not limited to equities, fixed income securities, mortgage loans, derivatives, alternative investments, structured assets, and other assets such as deferred tax assets.

(33:43):
For liabilities, the BMA proposes publicly disclosing the reserves held by long-term insurers at a product type level. The disclosed information would encompass currency, gross and net reserves insurance, recoverables, average duration, and year-on-year changes in reserves. As part of the same consultation, the BMA proposes to introduce new rules requiring long-term insurers to disclose their asset liability management practices including disclosures that offer insights into the appropriateness of their investment strategies, liquidity adequacy, investment risk management practices, and an assessment of how market conditions will impact their portfolios.

(34:24):
Long-term insurers will be required to submit public disclosures on an annual basis as part of the capital insolvency requirements filing. The BMA has provided a proposed standardized reporting template, which will be used for the public disclosure of both assets and liabilities. This will ensure uniformity in the presentation of data across the sector, thereby facilitating comparisons and ensuring consistent and reliable disclosures.

(34:49):
The BMA’s intention is that the detailed disclosure of assets and liabilities will facilitate more informed decision-making by policyholders and other relevant stakeholders, by providing insights into the composition and risk profile of insurers investment and liability portfolios. By providing greater transparency into insurers investment activities, these requirements are intended to enhance market discipline and incrementally contribute to the overall stability of the global insurance sector.

Rob Chaplin (35:18):
Thank you, Abraham. That brings us to the end of today’s marathon episode. It’s evident that the regulatory framework in Bermuda is designed to balance the protection of policyholders and regulatory equivalents with the need for insurers and Bermuda to remain competitive. However, the rapid growth in Bermuda, especially in the life segment, has forced greater scrutiny from onshore regulators.

(35:42):
In summary, we expect that the market’s growth and increasing sophistication will lead to further regulatory evolution as the BMA adapts to new challenges. Bermuda is rapidly adapting its regime to be more equivalent and sympathetic to onshore regulation in order to preserve its position within the global reinsurance market. Its desire to be equivalent with the IAIS’s ICS will only push this further. We look forward to welcoming you to the next episode of our podcast, which will cover Japan. Thank you for listening today.

Voiceover (36:15):
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(36:32):
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