With new solvency laws, Bermuda should remain untroubled by capital adequacy problems or policyholder losses, explains Warren Cabral.

When Bermuda introduced new risk-based capital standards for insurance companies earlier this year, the main change was that it required information to be presented in a model, enabling regulators to measure risk.

Known as the Bermuda Solvency Capital Requirement (BSCR), the standards were implemented in phases, first among the Class 4 insurers, and subsequently among certain commercial Class 3 insurers.

As such, the Bermuda Monetary Authority (BMA) is able to analyse the impact and probability of failures among regulated insurers with a greater level of detail, thus updating the previous Insurance Act of 1978.

This previous law required insurers and reinsurers to meet a margin of solvency, as well as minimum amounts of paid-up capital for registration, or Regulatory Capital Requirement (RCR).

The RCR is calibrated according to scale of business, with higher premium and/or reserving levels requiring more statutory capital and surplus. No account is taken of the fact that certain lines or classes are riskier than others.

Insurers using the BSCR, or an approved in-house model, must also provide the BMA a more detailed annual Statutory Financial Return. Thus, the BMA can measure risk and also determine appropriate levels of capitalisation.

Conversely, while the product of the risk-based capital test is mechanistic, the BMA also believes it necessary to provide some limited degree of discretion for it to impose additional capital requirements on insurers in particular cases.

In those cases, the new risk-based capital model should be supplemented by a requirement for the affected insurers to conduct certain stress and scenario testing to assess potential vulnerability to extreme events. Where these tests indicate vulnerability, the authority would be able to require a higher solvency “cushion” by increasing the 120% figure.

The BMA has for many years monitored, managed and mitigated the risks taken on by the Bermuda insurers, ensuring that adequate capital is held against them. As a result, problems have been few, with policy-holder losses extremely rare. The overwhelming majority of registered insurers already operate at capital levels well in excess of the legal minimum. Accordingly, the BMA has stated it sees no need to greatly alter the overall relationship between aggregate capital held and risks underwritten in the Bermuda market.