Bermuda benefits from a strong and capital efficient regulatory regime
Bermuda’s long-term reinsurance sector is experiencing a new phase of complexity and scrutiny but will remain strong, say Max Tetlow and Cathryn Minors of Appleby.
The long-term reinsurance sector, also known as the asset intensive sector, has seen remarkable growth in Bermuda in the past decade. To what do you attribute its success?
Bermuda’s long-term reinsurance industry has grown at a tremendous rate over the past 10 years for a number of reasons. This success can be attributed to a combination of regulatory and market-driven factors.
The Bermuda Monetary Authority (BMA) is widely considered to be a credible, collaborative and pragmatic regulator that prioritises policyholder interests. It has implemented a prudent and internationally recognised regulatory regime. For example insurers may seek approval from the BMA to utilise the scenario-based approach (SBA) which allows insurers to model asset-liability management more accurately. Bermuda also holds Solvency II equivalence and has National Association of Insurance Commissioners (NAIC) Qualified Jurisdiction status.
Asset intensive insurers are one of the few industries that like high interest rate environments. This is because higher yields earn better returns to cover their obligations to policyholders. This, coupled with an ageing population, increased longevity and a shift from defined benefit to contribution pensions, has resulted in a flourishing asset intensive sector. It follows that primary insurers globally have large blocks of long-duration liabilities that they want to reinsure, to free up capital to issue more policies. Bermuda’s strong and capital efficient regulatory regime allows them to do so confidently and prudently.
How would you assess the current state of the sector?
The life reinsurance sector is at an interesting juncture. It is certainly strong, and will remain so, but it is experiencing a new phase of complexity and scrutiny. The size of transactions and participants are large and fast-moving, resulting in a very competitive industry.
In recent years, overseas regulators have taken notice of the amount of insurance ceded offshore, particularly to Bermuda. The BMA has continued to evolve its regulation and approach to assess and understand Bermuda re/insurers risk profiles. While this supports stability and certainty in the industry, it increases the cost on the insurers. Rating agencies are also publishing stricter methodologies. Nevertheless, it is clear that Bermuda long-term insurers are not seeking lower capital requirements and less regulation. The BMA reports that median solvency ratios are 259%, notably higher than the 120% minimum or the 200% that most insurers target. What we are seeing is a flight to quality where good corporate governance, frequent regulatory contact and sound and experience staffing is being focused upon.
What is the outlook for the rest of 2025?
We expect continued growth for the remainder of 2025. On the regulatory side, there have been a number of recent changes, so we do not expect to see those at the same pace as 2024. This year will be a year of refining and compliance. The most successful reinsurers will be those with the strongest ALM, liquidity and governance standards. In terms of transactions, large, closed blocks will continue and we would not be surprised to see some consolidation should market volatility settle.
“The success of this sector is evident with the size, speed, complexity and scale of the transactions. This indicates that, on a global scale, substantiated concerns about the jurisdiction are limited.”
How important is the role of the Bermuda Monetary Authority in the sector?
Every effective insurance regulators’ role is vital to the success of their relevant sector. Regulators lend credibility to their jurisdiction as they are gatekeepers and custodians, responsible for licensing participants and regulating the market and the BMA is no different. The BMA has done a great job of attending, chairing and presenting at international committees so that overseas regulators are more aware of the BMA’s objectives and the positivity of Bermuda. The BMA has also worked hard in obtaining and sustaining Solvency II equivalence and NAIC status which has been critical to Bermuda’s success in the international reinsurance sphere.
The BMA has the unenviable task of balancing the commercial needs of its re/insurers while preserving the reputation of the Bermuda market and ensuring the paramountcy of policyholder interests. For example, to address the unique characteristics of the long-term reinsurance sector, the BMA has implemented additional regulatory standards for the approval of long-term block transactions. Bermuda insurers could be subject to higher costs as a result, however, it is the BMA’s heightened attention to this area that allows Bermuda to operate a transparent, well governed and prudent framework, attracting further business to the island.
In recent years, long-term reinsurers have come under increased scrutiny from overseas regulators and media raising concerns about the Bermuda market. Why is that, and to the extent they were valid, do you believe that their concerns have been addressed?
It is no secret that in recent years long-term re/insurers, particularly in the offshore sector, have come under increased scrutiny from overseas regulators. One of the focuses has been on private equity-owned re/insurers and their investment strategies and structures. Everyone needs to remember that private equity owned re/insurers are made up of sophisticated investors, high net worth individuals, foundations and endowments and as such these are no different from ordinary investors incorporating re/insurers.
The BMA and the Bermuda market have taken the necessary steps to address these misalignments, for example, through the use of independent non-executive directors (INEDs) and the appointment of chief investment officers (CIOs). The BMA often recommends that INEDs control committees or be the chair. Additionally, conflict of interest policies are considered in great detail, with the BMA typically requiring the INEDs to approve all conflicts of interest and related party transactions. The vetting and appointment of credible CIOs and other senior managers allow companies to have the appropriate oversight reducing risks. All of the aforementioned requirements allow procedural protection and mitigate concerns about fairness and legitimacy within these structures.
The BMA is very conscious that the reputation of the jurisdiction is important and, where necessary, it has taken steps to collaborate with international regulators and increase oversight. Recent enhancements including stricter governance controls (mentioned above), asset and liability disclosures, tighter ALM oversight, approval for assets with counterparty credit exposure, increased on-site reviews and strengthening the prudent personal principle have resulted in Bermuda’s long-term re/insurance industry being better regulated than even three years ago. Overall, the success of this sector is evident with the size, speed, complexity and scale of the transactions. This indicates that, on a global scale, substantiated concerns about the jurisdiction are limited.
What role does a law firm such as Appleby play in ensuring that long-term re/insurers in Bermuda are successful and meet international legal and regulatory standards?
Appleby is the market leader in the long-term re/insurance sector and has been since the birth of this industry. As a result, it plays a critical role in providing not only expert legal and regulatory advice but also by having deep industry knowledge and a positive network with the necessary regulatory bodies. We are able to advise clients in real time on the latest and upcoming market requirements or trends. This means that our clients are always well prepared for any meeting with the BMA or on any transaction in this space allowing our clients to avoid any time delays or unnecessary legal costs.
We advise many re/insurers from inception which allows us to understand their business needs inside and out. As a result, we are well equipped to know how any changes in legislation/regulation will impact them, what their appetite for such changes will be and how best they should go about addressing them. This allows us to have deep industry knowledge, which is critical when working with regulators to ensure the success of the long-term re/insurance market.
Additionally, where there are disputes or regulatory investigations, we use our legal and industry knowledge to act in our client’s best interests. Lastly, we are there to assist when our clients need to restructure or liquidate making Appleby a one-stop shop for any matter involving the long-term sector.
Sidecars have been growing in popularity for long-term reinsurers. What are the benefits of having a sidecar in this sector?
Long-term sidecars can provide capital relief to cedants by providing an alternative source of capital, capacity and diversification. These structures support the health of the life re/insurance industry as they provide both investors and insurers with the opportunity to spread risk and use time to fully realise returns.
Common investors in sidecars include asset managers, sovereign wealth funds and pensions, all of which are very long-term investors. The capital these institutional investors provide is often cheaper and faster for an insurance company than raising its own debt or equity. These structures often provide long-term re/insurers with additional capital in an efficient manner and hence the increase in popularity.
What are some of the potential hazards for the sector?
Globally, the potential hazards that the long-term re/insurance sector faces are primarily social and economic. These include longevity, economic instability, interest rate volatility, climate change, reputational and regulatory pressures.
For the long-term sector, one of the ways in which companies can be hazards for the sector is by not having the appropriate governance structure from inception. It follows that it is important that life insurers appoint an appropriate number of resident directors, INEDs and senior executives all of which should have fit and proper experience.
Bermuda is one of the few jurisdictions that requires a proper experienced resident corporate governance structure in place. For instance, all Bermuda long term re/insurance companies are required to have resident directors, an appropriate number of independent directors and a board that holds the level and experience to run the company. For example, experience in operational risk and investments is paramount. This not only applies to the board but also its committees. The BMA understands the importance of corporate governance as being part of the solution to this potential hazard and, as a result, there has been increased focus on this area.
What does Bermuda need to do to maintain its leading position in the sector?
Bermuda needs to continue to maintain a strong and credible regulatory regime that is proactive to market changes and global pressures. The BMA has done an excellent job of being internationally recognised as a top regulatory authority worldwide. This is being achieved by the outreach programme that the BMA has implemented, in attending international conferences, meeting with onshore regulators and running international committees on important topics that the re/insurance industry is focusing on.
Additionally, the BMA will need to continue its work in being compliant with international regulations and working with insurers and stakeholders to balance the pressures from onshore and the needs of the life sector. As a result, the BMA should continue to operate as it currently does to bring even more success to Bermuda re/insurance market.
Bermuda, thanks to our regulator, insurers and other stakeholders, has always been adaptable, resilient, transparent and commercial. Continued adherence to these tenets, such as expanding capital channels, drawing from diverse expertise, utilising technology, fostering trust and cultivating talent will preserve its leading position.
Max Tetlow is a partner and Catherine Minors is counsel in the corporate department of Appleby’s Bermuda office. To find out more about Appleby, visit applebyglobal.com
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