Reflecting on regulation
It looks increasingly likely that the European Commission will recommend Bermuda’s commercial insurance class for equivalence in September. This will be an important achievement for the Bermuda regulator and a boost for re/insurers on the Island.
“It is an important milestone,” says Brad Kading, chief executive of the Association of Bermuda Insurers and Reinsurers (ABIR). “The benefits to Europe are clear: more reinsurance capacity and regulatory recognition will make insurance markets more competitive by eliminating cross-border collateral and removing the risk of capital add-ons.
“This means consumers will benefit; there will be more engagement with EU regulators and this will increase EU jurisdictional regulatory knowledge with access to prudential information about Bermuda’s commercial insurers.”
Kading adds that Bermuda’s carriers are historically well integrated into both the EU and the US insurance markets. The regional standards simply help secure those relationships.
“These regional standards are stepping stones to international standards now being created by the International Association of Insurance Supervisors (IAIS). Qualification by the US and the EU should help speed an International Monetary Fund finding about Bermuda and its adherence to international standards, the next time such a Financial Sector Assessment is completed.”
An early adopter
Federico Candiolo, corporate counsel at ASW Law, adds that its early commitment to attempting to secure equivalence has held Bermuda in good stead, and it now faces fewer regulatory challenges as a result.
“In light of the hard work that went into Solvency II, Bermuda does not face many insurance regulatory challenges at present. Bermuda is already ahead of the curve when compared with many of its competitor jurisdictions,” Candiolo says.
“It was one of the first jurisdictions to commit itself to seeking equivalence, and it is expected that it will be among the first jurisdictions to obtain equivalence. Although whether it will be full equivalence or equivalence for its reinsurance sector only is yet to be determined.”
He notes that changes made to the Insurance Act 1978 and related regulations to bring Bermuda’s insurance regulation to a position where it can be deemed equivalent to Solvency II by the European regulators have been of recent and great importance to securing equivalency.
“These changes are indeed welcome and sought by the large reinsurance carriers based in Bermuda, and it is anticipated that the class 4 and 3B insurers will no doubt be able to reap the benefits that stem from European equivalence,” Candiolo says.
“At the same time, it is expected that the captives market in Bermuda will continue to grow without hindrance from the additional regulations that now apply to class 4 and 3B reinsurers.”
“In light of the hard work that went into Solvency II, Bermuda does not face many insurance regulatory challenges at present. Frederico Candiolo, ASW Law
He adds, however, that the biggest challenges Bermuda will face going forward will depend not on regulatory changes in Bermuda, but in respect of the ever-changing landscape in Bermuda’s main markets: the US and Europe.
He cites the proposed passive foreign investment company (PFIC) regulations in the US as being one example of this. On April 23, 2015 the US Department of the Treasury issued proposed regulations concerning the status of non-US insurance and reinsurance companies as “passive foreign investment companies” under the US Internal Revenue Code of 1986, as amended. “If these regulations are implemented, they will have an impact on certain Bermuda insurance-linked securities (ILS) structures,” he says.
A solid track record
Bermuda’s ability to adjust to the new regime of Solvency II represents just the latest example of its regulator adapting successfully to changes.
Kading argues that Bermuda is successful as an insurance hub for four reasons. First, the Bermuda Monetary Authority (BMA) is very good at putting capital to work quickly in its licensing process. Second, the underwriting talent available makes the market a go-to place for underwriting judgement and offers of capacity. Third, it’s geographically convenient to large North American markets. Finally, it’s a capital-efficient location.
Dwelling on his first point, Kading explains the importance of the way the BMA has created a licensing class system that allows it to apply proportional regulation based on risk assessment.
“ABIR members are in the licensing classes that provide the most robust regulation and that meet or exceed international standards,” he says. “If you are a captive insurer you get a different but proportional level of regulation tied to the solvency risk of that entity.”
He adds that the BMA—in showing leadership in meeting regional standards (Europe’s Solvency II and the US state ‘certified reinsurer’ assessments) and in meeting the IAIS insurance standards and regulatory principles—has built credibility with peer group regulators and demonstrated the substance of its regulatory approach.
“You don’t go to Bermuda to escape insurance regulation,” he stresses. “By the time Solvency II is implemented next year, Bermuda will have had risk-based capital, mandatory stress testing, enterprise risk management reporting, legal entity public financial statements, group supervision and group capital requirements for four years.
“We are currently in our third trial run of our economic balance sheet. The BMA has demonstrated it can be both a substantive regulator and speed capital to market. It can speed capital to market because of its knowledge of capital providers, actuaries, accounting, underwriting management teams—it can quickly assess reputation and quality.
“The BMA knows the executives who make the market. It’s not impeded by a domestic market that tries to keep out competitors with seasoning requirements. Since it is a wholesale market it can focus regulation on prudential matters and does not have to devote attention to consumer suitability or forms regulatory issues.
“The BMA can focus on what it does best, sophisticated commercial insurance market regulation.”
Pragmatism breeds success
Candiolo describes the BMA’s approach as pragmatic and agrees that this has been hugely important to its success over the years.
“The continuous development of pragmatic yet responsible legislation and regulation for the reinsurance industry is what has helped Bermuda secure its key position in the insurance industry,” he says.
“The BMA is committed to advancing a regulatory framework that is not only sophisticated but is also practical, where licensees and service providers alike can expect regulation and supervision to be prudently and adequately calibrated on a risk-based approach.
“The fact that most of the developments result from the regulator’s willingness to engage in discussions with industry has facilitated optimal results for the insured and industry. For example, we had the introduction of the special purpose insurer regime in 2010.”
No matter its successes historically, however, there will never be an end game for the regulator, Candiolo stresses. In order for it to continue being successful, the regulatory environment will need to continue to develop and change in response to sensible market demands, he says.
“Bermuda has the right mix of industry specialists, prudent yet sensible regulators and a sophisticated legal system that can work together and create the synergies to deliver the best solutions for the new challenges faced by the insurance industry,” Candiolo says.
“Through the ILS growth over the past decade, Bermuda has demonstrated that this combination was instrumental in the expansion of the total capital available to meet reinsurance needs. It effectively unlocked capital from the traditional capital markets and enabled it to be deployed within the reinsurance industry. In the future, these actors will need to continue being responsive to meet the new challenges ahead.”
Kading also stresses the wider picture of all the work the regulator has done and continues to do to retain its status. “Bermuda’s commitment to international standards goes well beyond regulation,” he says.
Kading highlights the fact that the Bermuda government is committed to the OECD’s tax cooperation, transparency and enforcement agenda. It has tax information exchange treaties with all its major trading partners and through multilateral treaty commitments has now secured cooperative tax information agreements with more than 80 jurisdictions, including all the G20 countries.
“As deputy premier and minister of finance Bob Richards has said: you don’t come to Bermuda to evade taxes. If you do you will get caught in the tax enforcement commitments the government has made,” Kading says.
“In recent years this commitment has been recognised by actions taken in Argentina, Colombia, France and most recently Italy where withholding taxes or other cross constraints have been lifted.
“ABIR members and the commercial insurers in Bermuda are engaged in economic substance, employees are here, underwriting decisions are made here, risk is managed here. If you want a shell corporation without economic substance you’d be best advised to do it elsewhere.”