BMA consults on tighter investment and group supervision rules

The Bermuda Monetary Authority has released two consultation papers designed to improve regulation of investments and oversight of insurance groups with substantial operations in Bermuda. 

The consultations, plans for which were reported in Bermuda:Re+ILS earlier this week, appear to be designed to improve regulation of life re/insurance groups and to clarify who should regulate insurers which are either headquartered in Bermuda or which are part of a larger group which has business outside of the insurance industry. 

Both areas have come under increased scrutiny in the wake of the 777 Re crisis, which underscored the concerns of regulators about the risks embedded in offshore reinsurers’ investment strategies.  

777 Re was plunged into crisis after taking on significant exposure to assets connected to Josh Wander’s eponymous Miami-based investment firm, from football clubs to budget airlines. US insurers that had ceded billions of dollars in assets to the group were caught up in the fallout. 

In the consultation for the application of the Prudent Person Principle, the BMA said: “Global insurers, particularly those in the life and annuity sector, have experienced significant structural shifts over the past several years, including increased allocation to illiquid, hard-to-value assets that are non-publicly traded and can be more complex than liquid traded assets. 

“The Bermuda Monetary Authority (Authority or BMA) has increased its supervisory oversight of Bermuda's commercial insurers towards obtaining evidence that the risks associated with these shifts, including but not limited to increased allocation to illiquid investment strategies, are adequately understood, managed and governed.” 

While the BMA had already tightened up requirements for life re/insurers, it said it now intends to require re/insurers “to implement the PPP as an integral part of their risk management framework with regard to investment risk”. 

The consultation paper said it would require re/insurers to be prepared to demonstrate effective asset liability matching strategies including portfolio characteristics such as public versus private, liquidity for all asset classes, sophistication and qualification of investment professionals, portfolio construction, concentrations, equity investments including alternatives and real estate. 

“Insurers should also be prepared to demonstrate the appropriateness of any investment leveraging activities,” the paper said. 

It added that the PPP would require that “an individual entrusted with managing a client's funds may only invest in instruments that a reasonable individual who aims for capital preservation and return on investment would consider owning”. 

“This principle requires that the insurer, in determining the appropriate investment strategy and policy, may only assume investment risks that it can properly identify, measure, respond to, monitor, control and report on while taking into consideration its capital requirements and adequacy, short-term and long-term liquidity requirements and policyholder obligations,” the paper said. 

“Further, the insurer must ensure that investment decisions have been executed in the best interest of its policyholders (and beneficiaries). While this principle applies to all asset classes, special care may be warranted for assets with specific characteristics (e.g., private, affiliated, complex or highly illiquid assets). 

“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 deadline for comments on the consultation is February 5, 2025. 

The second consultation launched by the BMA concerns enhancements to the group regulatory supervision framework and appears to be designed to regulate Bermuda-based insurers which may have a parent holding company which is not involved in insurance itself or where the holding company is not regulated.

The proposal would enable the BMA to designate a Bermuda insurance group as an internationally active insurance group (IAIG) with operations outside of Bermuda. 

The BMA said: “The proposed enhancements reflect the growth and sophistication of Bermuda insurance groups including designation of a number of Bermuda insurance groups as Internationally Active Insurance Groups (IAIGs).

“Actions taken by the parent company, can affect the insurance entity's ability to comply with its regulatory requirements, particularly where those entities have little control or influence over the parent company's operations. This can pose risks to the insurance companies and the insurance sector. 

“The ultimate parent company of a Bermuda insurer will often decide overall group strategy and organisation, group risk management policies, group recovery plans and intra-group flows of capital and liquidity. The ultimate parent company may have the group's primary capital and debt-raising ability. The ultimate parent company is also usually the only entity that can alter the group structure above and around a Bermuda insurer.

“There are situations in which a parent holding company expands its risk profile by participating in certain investment activities and funds. While the BMA regulates and inspects financial institutions operating in or from within the jurisdiction and receives some information on these activities through its existing reporting requirements, it has no direct power over the holding company. Consequently, there are circumstances in which the BMA may wish to direct the highest-level parent entity of a regulated group, be it an insurance entity or an insurance holding company, to act or refrain from acting in a certain manner to mitigate the risks to policyholders .”  

The deadline for comments on the consultation is January 15. 2025. 

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