A global shepherd
EY talks with Bermuda’s regulator about the challenges of keeping the domicile at the cutting edge. A discussion between Jeremy Cox, CEO, BMA, and Andrew Smith, executive director, EY financial services.
Andrew Smith: Recent surveys suggest regulation is back at the top of the list of business concerns, particularly as regards the viability of business and the impact on decision-making. I am interested in your perspective on that as a regulator and in particular on regulatory trends.
Jeremy Cox: I am going to be a bit controversial. As a regulator, I can tell you there are two sides to this argument. There are concerns about regulation but I wonder how many of these are based on misperceptions. I sit in a number of different meetings across a number of different industries and clearly some regulatory trends and developments are worrying the financial services industry. Certainly, this can be challenging for the industry, however, even more challenging is the potential impact on long-term regulatory relations. I would argue further that this global, negative impression has done more to feed industry’s fear of over-regulation than anything else. Unfortunately, it also paints with the same brush other regulators who are genuinely trying their best to create appropriate regulatory environments with proportionate regulations that are workable for the firms which operate in their jurisdictions.
The best way to combat this, in my view, is to foster a good relationship with the entities you supervise. Healthy dialogue, as with any relationship, is key, but there is a danger that dialogue can be pushed aside in a rush to meet international standards. This is why the BMA has always sought to create an independent approach to supervision, applying regulations of the type and at a speed appropriate to Bermuda while strategically aligning our frameworks with relevant international standards.
Industry, for its part, is trying its best to consult with its regulators. In fact, the sense I get is that there is more input coming from the industry than ever before. Groups such as the Geneva Association are presenting their views at conferences I attend and it seems as if the regulators are generally willing to listen. Regulators often walk a very fine line, on the one hand making sure that policyholders are protected while at the same time endeavouring to maintain working relationships with the entities they supervise. They sit and listen, and don’t give much away at the time, but I can assure you that behind the scenes they are often grappling with international pressures and expectations.
Smith: Supervision is one particular area where the BMA has taken a leadership position. But we are also seeing overseas regulators increasingly trying to ring-fence the protection of their policy holders. How is that impacting the move towards effective group supervision?
Cox: Group supervision has never been an easy goal. I was talking to a company yesterday and we were speaking about some of the issues that come up in supervisory colleges. Unfortunately, regulators are probably not playing in the sand box as well as we should. But in today’s world, it is not just about assessing another regulator’s technical standards and getting comfortable with standards across various jurisdictions. It is also about trusting that a regulator can do its job to an acceptable level.
Supervisors need to have a healthy respect for one another. The BMA has achieved this respect over the years through our work to enhance our supervisory framework as well as our many contributions to the international regulatory debate for insurance. Given the portfolio of Bermuda’s internationally active groups, it was critical for the BMA to aggressively embrace the changes necessary to facilitate effective group supervision. These changes have positioned Bermuda as a top tier regulator and supervisor. So clearly, when we walk in a room, people know who we are and what we stand for. All these factors make regulators feel comfortable interacting in a college format.
So we are starting to see a clear acceptance and comfort among regulators with what we are doing in Bermuda. We are fielding questions from other regulators asking, ‘How did you deal with this issue? How did you introduce a process that worked for your jurisdiction and for your types of companies? How did you build your capital model and what are some of the key issues that came on day one that you had to resolve?’
Those types of discussions will be very fruitful to build the types of relationships we need. On the European side, we have very good relationships with the European Insurance and Occupational Pensions Authority team and in the US with the National Association of Insurance Commissioners (NAIC).
Smith: Were you surprised by just how positive recent comments about the BMA from NAIC were?
Cox: No, I was not surprised. The BMA has attended NAIC meetings for many years as part of its regular international advocacy efforts.
The Bermuda/US relationship has always been a special one and is really where it needs to be. In fact, in December, we expect to be one of the first jurisdictions to receive conditional qualified jurisdiction status from the NAIC. [In late December 2013, Bermuda was recognised as a conditional qualified jurisdiction alongside Germany, Switzerland and the UK.] Bermuda was the first country asked by the NAIC to participate in their process. We responded very quickly in the affirmative and look forward to working with the NAIC to complete the process in coming months.
Smith: Is it possible to go to an event or walk down the street without hearing about new sources of third party capital coming into the insurance space? What is your take on the implications for the traditional carriers in Bermuda?
Cox: Frankly, in the early days there was some real concern in the market about this new injection of capital into the traditional reinsurance space. But what I now sense is that people are embracing the changes taking place. For us as regulators, we had to ensure that whatever business was developing in this jurisdiction was credible and would not pose a risk to Bermuda’s reputation. We have a strong licensing process to ensure companies are being classified under the right class of licence.
I remember some of the early Special Purpose Insurer (SPI) applications and sitting down with our head of licensing and we initially questioned whether we should move forward with them because they seemed so different.
The BMA has done a good job making sure we are approving new registrations appropriately and have the right supervisory framework in place to review them moving forwards. Our supervisors are making sure they understand these entities to ensure the jurisdiction retains its world-class reputation internationally.
It is important to remember the roots of Bermuda as the world’s re/insurance laboratory. Structures such as SPIs are created when you put an innovative regulator in the same room as a smart alternative risk transfer expert with access to billions of dollars in capital and surplus. For Bermuda to continue to remain relevant in the world of
re/insurance it is vital that we remain open to new ideas, new ways of thinking about risk transfer. Other jurisdictions may be able to risk ignoring something because it is different or new. That is not an option for us.
At the same time, this is familiar territory for us. We regulate a unique marketplace. The world’s biggest concentration of captive insurers exists here alongside a major commercial market for insurance and reinsurance capacity. For as long as I can remember, we have supervised an industry whose component companies have always competed with one another. Basically, the implications for traditional carriers are no different today than they were before alternative capital arrived on the scene. Constant competition is the inevitable result of constant innovation.