The Bermuda Monetary Authority outlines its developing approach to group-wide supervision, a methodology that will place it at the forefront of global insurance regulation.
As the Bermuda Monetary Authority (BMA) enters a new year, a refocusing of regulatory priorities has begun. After completing a significant amount of policy development in recent years to build upon Bermuda’s existing insurance framework, the BMA is now moving towards the implementation of its enhanced supervisory regimes.
A major part of this development is establishing group supervision. The vast majority of the ground work needed to implement group supervision has already been put in place. In 2011, the BMA identified 21 Bermuda-based insurance groups for which the BMA will be the groupwide supervisor (GWS). A trial run of the group’s Bermuda solvency capital requirement (BSCR), the BMA’s standard capital model, was also conducted. In addition to group solvency and financial reporting requirements being in place, we have established group-specific on-site processes and we will apply the framework initially to Class 4 and Class 3B groups, incorporating insights gained from the trial run and group on-site pilot reviews. As part of its GWS preparations, the BMA issued a group supervisor questionnaire to certain Bermuda long-term and Class 3A insurers to determine those firms for which the BMA may assume responsibility as GWS. We will complete assessing the market’s responses to this survey in 2012 to assist with finalising our plans for group supervision of this sector.
With the implementation of group supervision on the horizon, the three BMA directors most closely connected to the initiative explain what group supervision will mean both in the context of Bermuda, and also for regulators and insurers worldwide.
The complexities of group supervision are recognised by regulators and the market, and present a challenge as supervisors and insurers adjust to group supervision.
Mary Frances Monroe, the BMA’s director of Policy, Research & International Affairs, said that the nature, scale and complexity of Bermuda insurance groups has significant implications for the level of sophisticationrequired of the policy and supervisory frameworks in Bermuda, and points to the need for coordinated oversight of the operations of insurance groups.
"With groups being liable to periodic changes in structure, scale of business and reporting methodologies, it is important that the GWS is also allowed to remain flexible in the way it supervises groups."
“The large, internationally active insurance groups in the Bermuda market generally consist of multiple entities domiciled in various jurisdictions or clustered in geographic hubs in order to maximise efficiencies related to various product lines and business operations, tax and regulation,” Monroe noted. “Groups also achieve efficiencies through reinsurance arrangements, capital support schemes and other intra-group transactions. While efficiencies can be achieved through these complex financing structures, they also give rise to risks that have to be appropriately identified, monitored, managed and controlled on an enterprise-wide basis. The group-wide risk management that large insurance groups put in place needs to be complemented by a regulatory and supervisory approach that considers group risk and intra-group risk contagion. This is reflected in the policy framework for group supervision that the BMA has developed over the last few years.”
Implementing group regulation and supervision is a challenge for jurisdictions around the globe, on account of different legislative and regulatory structures and the range of accounting conventions.
There are, however, movements towards convergence on both a global and regional basis. On a global basis, the International Association of Insurance Supervisors (IAIS) has facilitated the development of agreed principles for regulation and supervision, as well as the establishment of mechanisms for supervisory cooperation and coordination. The EU has likewise moved towards convergence on standards, through the development of Solvency II.
“These mechanisms for enhanced cooperation and coordination will not prevent the next crisis but, hopefully, will allow global supervisors to respond more nimbly when it does occur, so as to mitigate and minimise financial instability,” Monroe said.
With groups being liable to periodic changes in structure, scale of business and reporting methodologies, it is important that the GWS is also allowed to remain flexible in the way it supervises groups.
This is the opinion of Craig Swan, the BMA’s director of Risk Analytics, who believes that the scope of a group is vital.
“It is important that supervisors are able to have a regime that allows for flexible scope,” Swan said. “Groups can structure themselves in any number of ways. So it’s important, as supervisors, that we have that flexibility where we can address every key or material risk, and that as structures evolve, our scope evolves accordingly.”
Such considerations have been taken into account as Bermuda has developed its group supervision framework. Shanna Lespere, the BMA’s director of Insurance Supervision, Complex Institutions, said the BMA’s framework for group supervision covers three main categories: solvency; governance and risk management; and reporting and filing requirements. International cooperation will be a key component of the BMA’s groups’ framework, including leadership in supervisory colleges, and being signatory to several memorandums of understanding (MOUs) and the IAIS’s Multilateral MOU.
Another important element is developing a methodology for Bermuda to evaluate the supervisory practices of other jurisdictions—or third country regimes—with which it will share regulatory duties.
“Each group also makes a number of standard filings to facilitate our ongoing monitoring and supervision, for example, groups will be required to complete a group solvency self-assessment (GSSA), essentially an own risk and solvency assessment for Bermuda groups,” Lespere said. “The purpose of a GSSA is to review the risk limits, tolerances, monitoring and reporting in each subsidiary and these are then aggregated across the group. Group supervision is applied proportionally, based on the potential risk impact.”
Lespere sees the role of the GWS as being a coordinator of supervisory activities and information flows.
“The BMA is committed to a robust group supervision regime for each Bermuda insurance group, tailored to the structure of the group, its material risks and the key drivers of those risks. Functions of a group supervisor will include coordinating the gathering and dissemination of essential regulatory information during both dayto- day activities and emergency situations,” Lespere said. “At the same time, being a GWS will take into account the nature, scale and complexity of risks inherent in the business of all the companies that form each group.”
In terms of implementation, Lespere said that group supervision is not something that you can just turn on with a switch. Regulators and the market will have to adjust to the operational realities involved in establishing such regimes.
“Yes, group supervision can be a reality, but it will be a work in progress,” she said. “Relationships between jurisdictions and supervisors are key, so you must take into account the legal and regulatory frameworks of individual markets, which may pose challenges, especially in a crisis. That is why it’s very important to develop crisis management plans and seek consensus between regulators in advance of any problems developing.”
Swan said that in order to facilitate this consensus, the IAIS holds regular supervisory forums that enable senior supervisors to meet and discuss potential issues related to group supervision, to map ways forward and identify best practices.
“Collectively, supervisors can see what’s going on in various jurisdictions at those meetings, can amend and adapt to take a certain approach,” Swan said. “In this way, we can determine what best practice looks like, converging processing and enhancing communications.
“From the BMA’s own perspective, last year we also held meetings (or colleges) with host regulators from our Bermuda-based groups. In 2012, holding supervisory colleges, and being in regular contact with fellow regulators generally, will remain an important part of our work. We will use such colleges to review and assess the soundness of insurance groups. Supervisors will have to be in regular contact with one another in order to build the necessary working relationships to support group supervision.”
Lespere said international consensus is still building around the development of group regimes and policies, and the BMA is keen to continue to participate in and lead these discussions, which will influence the evolution of Bermuda insurance groups’ policy.
“The financial crisis taught everyone many lessons—there were failures and near-failures in the market,” Swan added. “But supervisors now have an increased emphasis on colleges and information-sharing in general, which is reflected in recent IAIS standards.”
And even though group supervision may be better understood in the banking context, Monroe believes that insurers are beginning also to recognise that group supervision is the new reality.
“A lot of coordination is involved,” she said. “Formalised MOUs and terms of reference are very important. Also, there needs to be a willingness to spend considerable time on group supervision because it necessarily demands a significant amount of resources, both human and organisational.”
Bermuda has taken on that challenge, being close to implementing fully its group supervisory standards for insurers. During its assessment in August 2011, the European Insurance and Occupational Pensions Authority (EIOPA) stated that Bermuda met the criteria as set out in its methodology for equivalence for group supervision, as well as the solvency regime for groups.
“We put out our groups rules at the end of 2011,” Monroe said. “EIOPA has come in and assessed us and believes we are going in an equivalent direction. This is a very good finding. So we have a good degree of confidence on the group side, and our framework is in place, but what is important going forward is execution.”
When asked about the perceived benefits of group supervision for regulators, she said that among other benefits, GWS facilitates the monitoring of changes to organisational structures and attendant changes to the group’s risk profile, and the identification and monitoring of risk concentrations and intra-group transactions and exposures.
“For regulators, group supervision mitigates the risk that things will fall through the cracks as compared to regulation in silos—it mitigates the risk that we will not see the interconnectedness of companies and interdependencies among risks.”
Lespere also cited the benefits of group supervision from the regulators’ perspective, especially in relation to coordinating activities between regulators and improving efficiencies in understanding the central governance and risk management practices being cascaded down from groups to legal entities.
She also identified two areas where group supervision will enable supervisors more readily to identify potential gaps in a company’s strategy: “Unregulated entities and their impact on a group, and parental guarantees may both cause a risk to the wider group,” Lespere said. “Fungibility of capital is key, and we need to understand how it all works together. The sum of all may not be enough for the whole.”
Lespere concluded: “This better understanding among regulators will create fewer information requests for companies and less duplication of efforts. Like-minded regulators will depend on the work of other equivalent supervisory regimes.”
Swan said there would also be a cost benefit to groups from the aspect of reducing the duplication of efforts. “The more regimes converge, the greater the cost benefit to groups filing similar returns,” he said. “If we talk as regulators, then groups should have to send less information to supervisors.”
“We will have a much better idea of what we are really faced with and knowledge is power when it comes to groups,” Swan said. “Overall, the message for all jurisdictions is to get on board now. The Bermuda market is looking ahead and making sure it is prepared properly for the future; group supervision will become the new reality.”
Mary Frances Monroe is director, Policy, Research and International Affairs; Shanna Lespere is director, Insurance Supervision—Complex Institutions; and Craig Swan is director, Risk Analytics at the BMA.
For more information on the BMA visit: www.bma.bm
BMA, regulation, Bermuda, Solvency II, equivalence