Solvency II equivalence: a tale of two sectors


Shelby Weldon

Solvency II equivalence: a tale of two sectors

Solvency II equivalence will be of considerable benefi t to the Island’s commercial and captive re/insurance sectors. The Bermuda Monetary Authority outlines its progress towards equivalency.

Several years ago the Bermuda Monetary Authority (BMA) made a strategic decision to achieve regulatory equivalence with other key fi nancial jurisdictions overseas—particularly relating to Bermuda’s regulatory framework for commercial insurance.

Recently, the BMA has focused this work towards achieving third country equivalence with Europe’s Solvency II directive. Work in this area is well advanced, and highlights include: launching our group supervision process; conducting a broader roll-out out of our evaluation of internal capital models; establishing the commercial insurers’ solvency self-assessment requirement (our Bermuda-specifi c own risk and solvency assessment [ORSA] procedure); and implementing an enhanced supervisory framework for the long-term insurance sector.

Equivalence and Bermuda’s captive insurers

Bermuda intends to remain the world’s leading captive domicile and in the context of growth across all insurance sectors, we continued to see a consistent increase in the number of captives registered in Bermuda last year. At the end of December 2011, Bermuda had 862 captives writing a total of $21.4 billion in gross premiums, up from 845 in 2010.

One of the insurance world’s hottest topics during the last 12 months has been the potential impact on the world’s largest captive jurisdiction if Bermuda achieves Solvency II equivalence. Since Bermuda is the first captive jurisdiction to seek Solvency II equivalence, observers are closely watching developments unfold. Progress to date indicates that Bermuda will continue applying a captive regime that remains workable for both the BMA and the market.

In its report to the European Commission (EC) about the first wave of jurisdictional equivalence assessments, the European Insurance and Occupational Pensions Authority (EIOPA) stated that Bermuda’s commercial insurers were broadly equivalent with Solvency II principles, with some caveats that the BMA anticipated.

"The BMA intends to balance regulatory equivalence internationally with implementing a framework that works for Bermuda's unique market."

During this assessment, EIOPA made a distinction between the supervisory regime for Bermuda’s commercial sector and the BMA’s supervision of the captive sector, finding the captive regime to be non-equivalent with Solvency II principles. The BMA felt this was an appropriate result, given the vastly different risk profiles of Bermuda’s commercial and captive sectors. It was also consistent with our decision to focus Bermuda’s Solvency II efforts on the commercial sector, given the volume of business being conducted between our market and Europe. By extension, EIOPA’s preliminary results also reflected ourview that supervisors should take the principle of proportionality into account when considering the application of their regulatory frameworks.

Proportionality is a key element when conducting risk-based supervision, a principle which Karel Van Hulle, the chief architect of Solvency II and head of unit for insurance and occupational pensions at the EC, recently stated acted “in the interest of the insurance industry and its customers”. Van Hulle said equivalence did not simply mean line-for-line duplication of European standards: “The intention is not to develop an approach that everybody must follow; instead it is to respect differences.”

This point of view is consistent with subsequent indications from the EC that it can grant bifurcated equivalence, recognising the differing risk profiles of sectors within the insurance market. This is also consistent with Bermuda’s long-standing approach to risk-basedsupervision. Fundamentally, in principle, it would be inappropriate to apply identical requirements to both commercial and captive sectors.

In practical terms what this means is that as the BMA pursues Solvency II equivalence in relation to its commercial framework, Bermuda’s captive sector will continue to benefit from appropriate and pragmatic regulation. The captive sector remains core to the Bermuda market as a whole and all parties recognise the significant value this sector brings to the jurisdiction.

Bermuda and Solvency II: next steps

EIOPA has indicated that the date Solvency II will come into force is January 1, 2014. In terms of next steps, EIOPA will launch public consultation on draft proposals for standards and guidelines in relation to Level 2 implementing measures which, at the time of writing, was expected to take place this autumn. The submission of final proposals for standards to the EC and the finalisation of guidelines are currently planned for spring 2013.

EIOPA has pledged to review its report on first wave equivalence assessments after Solvency II’s Level 2 implementing measures are finalised. This will be the opportunity for it to update the evaluation of Bermuda’s framework. We are actively addressing the caveats that EIOPA raised in its report and our plans to develop Bermuda’s framework remain on track for completion by January 2013.

The BMA intends to maintain its risk-based, proportionate approach to the regulation of Bermuda’s diverse range of insurers and reinsurers. We are committed to balancing regulatory equivalence internationally with implementing a framework that works for Bermuda’s unique market. Taking this kind of pragmatic, risk-based approach to regulation, for both commercial and captive insurers, will support Bermuda’s unique position as a world-class insurance jurisdiction.

Shelby Weldon is director, licensing and authorisations, at the BMA. For more information on the BMA visit

Solvency II, BMA, Bermuda, ORSA, captive insurance

Bermuda Re