New regulations on financial statements, capital adequacy requirements, the Class 3 reclassification, and the SPI, are reviewed by Neil Horner and Natasha Scotland
Bermuda may be geographically an island but it is not in any sense remote from the developing trends in the insurance and reinsurance world. It continues to develop and refine its proven regulatory model based on the risk-based approach that is at the core of modern insurance and reinsurance regulation globally. The most recent changes introduced by the Insurance Amendment Act 2008 (“Amendment Act”) demonstrate that the Bermuda legislators are determined to keep pace with internationally evolving insurance and reinsurance standards and to achieve Solvency II equivalence.
The Amendment Act introduces several important changes to the regulation of insurance business in Bermuda. It introduces new requirements on Bermuda’s highly-capitalised prop cat and excess loss Class 4 carriers to prepare, in addition to statutory financial statements, audited financial statements prepared in accordance with GAAP or IFRS standards.
The Amendment Act also permits the Bermuda Monetary Authority (“BMA”) to make orders that set prudential standards for enhanced capital requirements and gives the BMA the power to require capital add-ons.
Additionally, it reclassifies Bermuda’s Class 3 insurers into three classes, 3, 3A and 3B. The new legislation further permits the establishment of a “special purpose insurer” to conduct “special purpose insurance”.
The Amendment Act requires Class 4 reinsurers to prepare and file with the BMA additional financial statements prepared in accordance with GAAP or IFRS which must be audited. The BMA shall publish such statements in the manner it considers appropriate to bring them to the attention of the public. The filing and publication of these financial statements will provide greater transparency in relation to the financials of Class 4 companies.
Class 4 reinsurers are already required to file with the BMA statutory financial statements prepared in accordance with the requirements of Bermuda’s Insurance Act 1978 and its related regulations.
Enhanced BMA powers
The Amendment Act permits the BMA to prescribe by order prudential standards in relation to enhanced capital requirements and capital and solvency returns, which must be complied with by registered insurers. Such standards may impose different requirements to be complied with by different classes of insurers. This provides the primary legislative basis for the adoption of the Bermuda Capital Solvency Requirements (“BSCR”) which is more attuned to the specific risk profile of the carrier than previously. The adoption of BSCR is part of the BMA Roadmap towards Solvency II Equivalence.
The BMA may make adjustments to an insurer’s enhanced capital requirement and available statutory capital and surplus. The BMA can only make such adjustments in certain prescribed circumstances. These relate to the BMA concluding that the risk profile of the insurer deviates significantly from certain underlying assumptions. Any adjustments so made would only have effect 90 days following notification to the insurer.
Prior to the Amendment Act Bermuda’s class 3 insurers comprised a miscellaneous class categorised by not being licensed as Class 1 (single or group owned captives), Class 2 (multi-owner captives and/or captives writing up to 20% unrelated risk) or Class 4 (writing property catastrophe reinsurance or excess liability business). Related risk means risk from affiliates, whereas unrelated risk means risk from non-affiliates. Class 3 insurers covered a wide spectrum ranging from essentially captive-type entities with a level of unrelated risk that exceeded 20% through to commercial reinsurers that wrote only unrelated risk. Consistent with Bermuda’s risk-based approach towards regulation, it was felt appropriate to reclassify the sector more comprehensively to recognise the different types of class 3 insurer. Bermuda’s class 3 insurers have now been reclassified into Class 3, Class 3A and Class 3B.
Class 3 insurers now includes insurers whose percentage of unrelated business represents more than 20% but less than 50% of unrelated business (on a net premium basis). Existing class 3 segregated accounts companies will be allowed to remain as Class 3 insurers at this time. Likewise, fully collateralised sidecars will not be required to re-register as Class 3A or Class 3B.
Class 3A is the category which is expected to apply to the majority of existing Class 3 insurers and will include those insurers whose percentage of unrelated business which exceeds or is expected to exceed 50% of net premium written and/or net loss and loss expense provisions, and where the unrelated business premium does not, or is not projected to exceed US $50m.
Class 3B will include insurers the percentage of unrelated business of which exceeds or is projected to exceed, 50% of net premium written and/or net loss and loss expense provisions and where the unrelated business premium does exceed or is projected to exceed US $50m.
Class 3B insurers will be subjected to restrictions on payment of dividends. These restrictions include making payments exceeding 25% of the Class 3B insurer’s total statutory capital and surplus unless certain declarations are filed with the BMA.
It should be noted in this context that “loss and loss expense provisions” means the amount calculated in relation to a body corporate by the application of the principles set out in the Insurance Accounts Regulations 1980 for the calculation of those amounts in relation to an insurer, and “unrelated business” refers to the insurance business consisting of insuring risks of persons who are not shareholders in, or affiliates of, the insurer.
Notwithstanding the above provisions, the Amendment Act provides that the BMA may register an insurer in any particular class even if the company may not qualify to be registered in such class if the BMA deems such registration appropriate.
The Amendment Act includes transitional provisions in relation to Class 3 insurers. It requires insurers who so qualify to make application to the BMA to be reclassified as Class 3A or, as the case may be, Class 3B insurers before 31 December 2008. Failure to do so would enable the BMA to cancel their registration.
The Amendment Act legislatively creates the concept of a special purpose insurer (“SPI”) with the following features:
• A SPI will only be permitted to write “special purpose business” which is defined by the Amendment Act as insurance business under which an insurer fully funds its liabilities to the persons insured through a debt issuance where the repayment rights of the providers of such debt are subordinated to the rights of the person insured or some other financing mechanism approved by the BMA or through cash or time deposits.
• The minimum paid-up share capital will be $1.00.
• An SPI must maintain sufficient assets to meet its insurance obligations given the size, business mix, complexity and risk-profile of the SPI.
• The SPI will be restricted from entering into any other business agreements except those which are related to its special purpose.
The Amendment Act describes what factors should be considered by the BMA when it comes to registering a body as an SPI. The BMA should have regard to whether the insurer is solely insuring or reinsuring one or more risks or group of risks with one or more policyholders and the sophistication of the policyholders or the sophistication of the parties to a debt issuance or other funding mechanism.
These new provisions will enhance Bermuda’s ability to offer innovative transformer type structures.
Bermuda continues to provide a responsible yet dynamic environment for insurers and reinsurers to conduct insurance business. Risk-based regulatory supervision is core to the continued success of the Bermuda insurance proposition.
Neil Horner and Natasha Scotland are at the law firm of Attride-Stirling & Woloniecki, in Hamilton, Bermuda