BERMUDA Law and Practice Contributed by: Brad Adderley, Matthew Carr, Max Tetlow, Cathryn Minors, Josephine Noddings, Aleisha Hollis, Melinda Mayne, Milaun Perott and Mya Gibbons, Appleby
approach is underpinned as a risk-based framework, focusing on risk identification, assessment, prioritisa- tion, resource allocation and response. This approach encompasses a multiphase risk-based programme including planning, risk impact grouping, monitoring and supervisory actions. The standard go-to approach to regulation over the insurance sector has proved to be effective in ensur- ing that insurers carefully assess their risk and provide protection to policyholders. However, Bermuda has a number of long-term insurers with a significant number of highly bespoke reinsurance structures and asset portfolios. For these long-term insurers, the standard approach may be too blunt an instrument to effectively capture the market sensitivity of their business, and so the BMA is refining a scenario-based approach (SBA). This SBA aims to capture market sensitivity, interest rate sensitivity and the degree of cash flow matching between assets and liabilities. The BMA has set out specific criteria that must be met in order for an insurer to be approved to use the SBA. The BMA introduced prudential standards in rela- tion to all commercial (re)insurers’ enhanced capital requirements (ECR). The ECR is equal to the higher capital and surplus requirement of the BSCR or a company’s internal model. To enable the BMA to bet- ter assess the quality of the commercial (re)insurer’s capital resources, applicable (re)insurers are required to disclose the make-up of their capital in accordance with the “three-tiered capital system”. To minimise the risk of a shortfall in capital arising from an unexpected deviation or adverse event, the BMA expects such insurers to operate at or above a target capital level (TCL), which exceeds an insurer’s ECR. Additionally, the BMA expects these insurers to maintain available statutory capital and surplus of an amount that is equal to or exceeds the value of its ECR in accord- ance with the thresholds of Tier 1, 2 or 3 capital, which should not be more (or less) than a percentage value of the insurer’s ECR. Under this system, all of the (re)insurer’s capital instru- ments will be classified as either basic or ancillary capital, which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics.
Highest-quality capital will be classified as Tier 1 capi- tal, and lesser-quality capital will be classified as either Tier 2 capital or Tier 3 capital. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3, capital may be used to support the insurer’s solvency margins and ECR. While not specifically referred to in the Insurance Act, the BMA has also established a TCL equal to 120% of its ECR. While an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA. Failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory over- sight. Recently, the BMA has required TCLs of 185% of the ECR for new registrants, depending on the busi- ness being written. Any (re)insurer that fails to comply with its ECR must, at the point that the directors become aware of such failure or have reason to believe that such failure has occurred, immediately notify the BMA and then, within 14 days, file a written report detailing the particular cir- cumstances that led to the failure, and outlining their plan (including actions to be taken and an indicative timeline) on how they intend to rectify the failure. Additionally, and subject to any legislation to the con- trary, any insurer that fails to comply with their ECR is prohibited from declaring and paying dividends until the failure has been rectified with the BMA. Categories and Classes of Insurers The Insurance Act distinguishes between insurers that carry on the following activities. • Long-term business: consists of insurance con- tracts covering life, annuity, accident and disability risks and certain other types of contract. This does not include “excepted long-term business” (as defined in the Insurance Act). • Insurers carrying on general business: any insur- ance business that is not long term or special purpose. General business includes accident and disability policies that have been in effect for less than five years. • Insurers carrying on special-purpose business, including that under which an insurer fully funds its
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