Insurance equivalence: positive momentum
Following a year of signifi cant progress and development in Bermuda’s insurance regulation, the Authority is poised to meet its key regulatory goals for 2011. Chief among these is its goal to establish an enhanced supervisory framework that is viewed as equivalent to leading jurisdictions. The Authority will face its fi rst test in this regard when Bermuda undergoes its equivalence assessments under Europe’s Solvency II directive during the year. While preparations for this important initiative are well advanced, the Authority intends to complete a number of equivalence workstreams in 2011, with the aim being to place Bermuda in the best possible position for evaluation.
With much of its policy infrastructure in place, the Authority will shift its focus from policy development to implementing its enhanced supervisory regimes, while establishing further legislative changes as required. The Authority recognises the unique nature of the various market constituents. Therefore, it will establish its enhanced regimes using a risk-based, proportioned approach that is both workable for the Bermuda market and consistent with global standards.
The Authority outlines the strategic initiatives planned for 2011 in its recently published business plan. These initiatives include: extending risk-based capital adequacy requirements for re/insurers; implementing its group supervision regime; enhancing its long-term supervisory regime; and further development of both its transparency and disclosures regime and its internal capital models framework.
Extending capital adequacy requirements
After successfully extending implementation of the Bermuda Solvency Capital Requirement (BSCR), Bermuda’s standard capital adequacy model, to Class 3B insurers at the end of 2010, the Authority intends to further recalibrate the BSCR for application to Class 3As and selected long-term insurers in 2011. Consultation has already begun with select fi rms in the long-term sector and a discussion with Class 3A fi rms has been completed. The information gathered from this work will assist the Authority in refi ning the BSCR model forsmall/medium-sized insurance fi rms (the BSCR-SME). The Authority intends to apply the BSCR-SME in phases over a three-year period, beginning with 2011 year-end fi lings.
The Authority also made signifi cant progress on establishing tiered eligible capital requirements for insurers during the past year, and this work will continue in 2011. During the past year, rules regarding the type of capital resources eligible to meet regulatory capital requirement levels were completed and will become effective in 2011. Consultation on proposals to introduce an economic balance sheet is continuing. This is following the issuance of a discussion paper on the topic in 2010. The Authority’s position is that for solvency purposes, an insurer’s assets and liabilities should be valued on a consistent economic basis to represent its solvency position more accurately. As the Authority develops its regime, it is taking into consideration the feedback received from industry consultation as well as the ongoing international regulatory and accounting developments in this area. A consultation paper on this component of the Authority’s enhanced regime is scheduled for publication in the fi rst quarter of 2011.
Another key enhancement to the Authority’s solvency framework for insurers is the Commercial Insurers Solvency Self-Assessment (CISSA), which along with the BSCR analysis, on-site reviews and the conduct of stress tests will become a core tool within its supervisory process. The CISSA, a Bermuda-specifi c ORSA (own risk and solvency assessment) process that is consistent with existing guidance on ORSA from the International Association of Insurance Supervisors as well as Solvency II, is designed to provide insights on the risk management, governance procedures and documentation that support an insurer’s process for determining its own capital necessary to achieve its strategic and operational objectives. Consultation on the proposed CISSA was completed during the past year along with an electronic platform for reporting related to the CISSA. During this year, the Authority intends to complete a test run of the process with Class 4 and Class 3B fi rms for 2010 year-end fi lings. Full implementation of the CISSA is planned for the end of 2011.
In the area of group supervision, the Authority intends to build on the significant progress achieved thus far and is focused on the full implementation of its regime in 2011. During the past year, the overall framework for group supervision was successfully established, along with the legislative infrastructure that will facilitate the Authority being a group-wide supervisor. The Authority also initiated the supervisory process and procedures that apply to key components of its group supervision regime. In 2011, this work will continue, while taking into consideration the emerging developments in this area internationally and feedback on its proposed regime by Bermuda market participants.
Group rules covering areas such as the assessment of group corporate governance and risk management, group-wide solvency assessments, statutory group financial requirements and the treatment of unregulated entities that are part of a group were developed at the end of 2010. The Authority intends to complete industry consultation on these new rules in early 2011.
As regards group solvency, the Authority’s work to adapt the BSCR for insurance groups will continue during the year. At the end of 2010, the Authority conducted a consultation to assist with a group-level calibration and BSCR testing exercise. Following completion of this exercise in mid-2011, the Authority will be in a position to confirm the effectiveness of the group BSCR and the level of its output.
The Authority appreciates that implementation of a group supervision regime presents a significant adjustment for the market. It intends therefore to permit a 12-month transition period for firms to comply with the group solvency and eligible capital requirements.
Proportionate long-term change
The Authority recognised some time ago the need to enhance its regime for long-term insurers to ensure continued effective supervision of this sector and work has progressed steadily in this regard.
The changes the Authority is proposing to its long-term regime are consistent with the enhanced requirements currently in development for the Authority’s broader insurance framework. The authority will apply initiatives such as group supervision and CISSA to the long-term sector in a proportionate manner, in line with its risk-based approach to regulation. In addition, the Authority will implement the enhanced regime using a phased approach. The Authority intends to maintain dialogue with the market and affected firms as they transition to the new requirements.
Disclosures and transparency
Development of the Authority’s enhanced transparency and disclosure regime for insurers is taking place in three phases, over a five-year period. As with all of its framework changes, these enhancements are takinginto account the state of global developments in this area to ensure that changes are adopted appropriately for the Bermuda market.
In 2011, the Authority will complete the initial phase in this process, which it began in 2009 with requiring Class 4 and Class 3B firms to produce publically available GAAP (generally accepted accounting principles) financial statements. The goal of this phase is to enhance and standardise regulatory disclosures in the areas of risk management, governance and related financial information. Consultation on additional risk and financial disclosures relating to the CISSA and the accompanying catastrophe risk return was also completed in 2010. During 2011, the Authority will continue its consultation with industry as well as take into account emerging international standards on disclosures.
Internal capital models—moving forward
The phased development of the Authority’s internal capital model (ICM) framework is slated to continue in 2011. Taking this phased approach recognises the complexities involved in this area, as well as the considerable resources required to ensure the effective evaluation of such models.
During the past year, the Authority completed its ICM pilot reviews. The objective of this exercise was to test and further refine the planned ICM review and assessment process. The results of the pilot review have been valuable in informing the development of the ICM framework and have enabled the Authority to enhance the ICM qualification process significantly. During the year, the Authority intends to revise the ICM guidance notes based on the data from the completed pilot reviews, as well as industry and regulatory developments relevant to internal models. The guidance notes will be expanded to include Class 3A and 3B firms in 2011, and the long-term sector in 2012.
Strategic, effective regulatory change
The Authority is preparing Bermuda’s insurance framework for a major equivalency test under Solvency II. This makes 2011 a pivotal year for the Authority and the jurisdiction. Overall, the Authority is well positioned to meet the regulatory goals it has set for itself and is looking to maintain momentum as it continues its programme of strategic regulatory change. Building on the significant work that has been completed to date, the Authority is shifting its focus to implementation of its enhanced regimes. These revised regimes are designed to maintain a robust, effective framework for Bermuda’s financial services market. In this way, the Authority will continue supporting Bermuda’s position and global recognition as a wellregulated, first-class jurisdiction for financial services.
Craig Swan is director of policy, research and risk assessment at the Bermuda Monetary Authority. He can be contacted at: email@example.com