12 April 2013Life

Solvency II: delays create breathing room

Exploring the implementation of Solvency II and its implications for the Island, there was general agreement on the panel that Bermuda’s decision to adopt Solvency II equivalence had proved the right one for the Island, even as the Bermuda Monetary Authority (BMA) slows the pace of implementation following further delays in Europe.

David Skinner, chief financial offi cer and chief operating offi cer at Aspen, Bermuda, said that the BMA’s pursuit of an internationallyrecognised regime had proven benefi cial to the market, but questioned what impact delays to the implementation of the regime would have upon the regime’s credibility.

Shanna Lespere, director—international affairs at the BMA, said that Solvency II implementation would likely slip until 2016 at the earliest, with further delays still possible. She indicated that delays had, however, enabled the BMA to slow the pace of implementation, rather than getting too far ahead of Europe. “We don’t want to get ahead of global regulation—a position that could potentially disadvantage the market,” she said. Instead, the BMA has reined in the project, giving Bermuda players more time to digest its implications.

Francois Morin, deputy chief risk officer and chief actuary at Arch Capital, described the delays as beneficial, arguing that after a number of false starts it was important the project did not lose credibility by not providing the market with sufficient breathing room to adopt the new measures in a timely fashion.

Skinner agreed that more time needed to be spent defining issues such as eligible capital, but warned against endless delays, stating that the projects costs have already been significant and that continuing delays would only increase the regulatory burden facing the market. Nevertheless, he cautioned that regardless of a slipping timeline “the market must keep an eye on the ball as regards the development of Solvency II”. Lespere added that despite delays in Europe over implementation of Solvency II, the Island is “ready from a market perspective” for full implementation.

One of the intentions of Solvency II is to create an international regulatory framework, but there were concerns expressed by Morin that equivalent regimes could yet place regulatory constraints on one another, with little in the way of jurisdictional cooperation. Lespere answered that the intention is to increase the sharing of information between the various regulators involved in the project, but warned that it was a difficult task—one hindered by there “simply not being enough actuaries in the world”.

Skinner said that he supported the broader coordination of regulatory efforts, but warned that “what the industry doesn’t wantis duplication”. He added that the BMA needs to be confident that the international relationships it builds with other regulators can create necessary understanding and trust in order for duplication to be deemed unnecessary. Lespere indicated that through engagement with groups such as the European Insurance and Occupational Pensions Authority in Europe and the National Association of Insurance Commissioners in the US, Bermuda already has such relationships in place. “The trust is there and in many ways Bermuda is leading the way,” she said.

An alternative home

The BMA has not only positioned the Island at the forefront of Solvency II implementation, but has also created a globally-recognised and competitive space for special purpose insurers (SPIs), said Lespere. Coming into play back in 2009, Bermuda’s SPI legislation has been a “telling example of the regulatory environment being prepared for market developments”, she said. A responsive regulatory environment has enabled the Island’s insurance-linked securities (ILS) industry and the Bermuda Stock Exchange (BSX) to establish a significant reputation in the space, with the BSX now accounting for around 30 percent of global ILS issuance, she explained.

Skinner agreed that the BMA had created a market where “products can be brought to the market relatively quickly, while not sacrificing control or due diligence”. This has enabled the market to be at the forefront of developments in the industry and respond promptly to particular market dislocations. Addressing changes in the deployment of capital, Morin said that with capital players invested in bricks and mortar re/insurers are less able to enter and leave the market as quickly as they once did; the BMA has been obliged to work more closely with the market, encouraging greater pragmatism from the regulator. And it has been this pragmatism that is so highly prized by those in the Bermuda market.