Bermuda has set sail on a course for mutual recognition of its insurance rules with Europe and the US. David Sandham interviews the CEO of the Bermuda Monetary Authority.

The Bermudian insurance industry is a vibrant and thriving marketplace. Strolling through the centre of Hamilton, the capital, it is not unusual to spot senior executives of leading reinsurance companies hurrying to their meetings (and with Bermuda’s weather, why take a taxi?). Most of the major firms are nearby with bags of insurance expertise and plenty of capital concentrated in one place. It is rather like a Lloyd’s by the sea. The strikingly cerulean blue of the Caribbean Sea, that is.

Bermuda was first settled in 1609, so this year celebrates its 400th year anniversary. The settlement was in fact an accident, the result of Sir George Somers’ ship Sea Venture being wrecked en route for Jamestown in Virginia. A Spanish explorer had discovered Bermuda 100 years before, in 1503, but no one stayed: perhaps because of stories about spirits – they called it the Isle of Devils – but more likely because of its frequent storms. The British held onto Bermuda after the American Revolution, and it remains a British Overseas Territory. However, it is self-governing with its own laws, House of Assembly, Premier, and Cabinet.

The Bermudian insurance industry, one of the world’s most important markets, began in 1947. In the past six years it paid out $25bn in United States property catastrophe claims alone. According to a recent report The Road Ahead by management consulting firm Oliver Wyman, Bermuda accounts for 8% of the world’s property and casualty exposure.

Though strong, the Bermudian insurance industry faces challenges. One of the toughest is that Europe’s emerging regulatory regime that could make it harder for non-European companies – including Bermudians – to operate in Europe.

Matthew Elderfield, CEO of the Bermuda Monetary Authority (BMA), speaking to Global Reinsurance, says: “Achieving mutual recognition is an important objective for the BMA and the jurisdiction as a whole. There is a very good partnership between us, the industry, and the government to drive it through. Mutual recognition is important for Bermudian companies to be able to access the EU and US markets on a non-discriminatory basis, for example on collateral requirements, and to avoid duplicating solvency requirements or other regulations. For example, if you are a Bermuda-based company and there is mutual recognition, then the solvency rules for Bermudian entities will be recognised. If you do not have mutual recognition, then there is the disadvantage of duplicating rules for the Bermudian group.”

But with Bermuda’s traditional background as a light touch regulatory regime, how quickly can it achieve mutual recognition? “We have made good progress toward achieving mutual recognition,” Elderfield says. “We are at the front of the pack among countries readying for Solvency II. We already brought in the BSCR in legislation passed last year. We have also done a big aspect of Pillar 3 of Solvency II by requiring insurers to disclose their GAAP financials. We aim to break the back of Solvency II and get most of it done in 2009: at the end of 2009 our policies on Pillars 1, 2 & 3 and group supervision will have been set out. Our goal is that in 2011, large commercial insurers – Class 4 insurers certainly, and perhaps also Class 3B and Class 3A insurers will be compliant. We want 90% to be done a year out from Solvency II being finished.”

If Elderfield achieves his aims, this would put Bermuda ahead of Europe. The European Union’s Council of Ministers approved a version of the Solvency II Directive last year; but disagreements among European member states mean that implementation may be delayed from 2012 to 2013 or later.

The BMA currently has between 130 and 140 staff - “enough for what we need to do this year”, Elderfield says. “But to achieve mutual recognition, if we have a lot of model applications, then we shall need more.” He says that the BMA charges companies a $50,000 model application fee, which buys actuaries’ time.” It has a two-tier staff training programme on economic capital models in 2009, run by a professional services company.

CREDIT CRISIS

In assessing the impact of the financial storm on Bermuda, Elderfield divides the crisis into three elements: the subprime crisis, the crisis of confidence in September-October 2008 (which included the Lehman bankruptcy and the AIG bailout), and the asset losses (whose full effect is still becoming known).

He says the subprime crisis had a limited impact in Bermuda: most was on financial guarantee companies, and a couple – SCA and CIFG – faced challenges. “We worked closely with them on their commutation arrangements,” he says. “Then in the September-October 2008 financial crisis of confidence, commercial insurers did relatively well. AIG has a strong presence in Bermuda and we had close liaison with the US authorities about the company to help facilitate asset sales,” he says.

He says asset losses took a significant chunk of capital out of the insurance industry – “equivalent to a medium-sized hurricane hitting them.” In the next few weeks the BMA will focus on the life sector and long term insurers, given their exposure to equity market fluctuations. Inherent in the life business is a higher equity exposure. “The US is exploring flexibility in solvency rules,” he says. “In some cases there will be unrealised fair value losses. We shall look at the question of whether we should be providing flexibility to long term companies.”

Even though Bermuda was not to blame for the credit crisis, it is – alongside all British offshore financial centres – subject to an official review set up by the UK government. What does Elderfield think the Review will have in store? “It’s early days,” he says. “We shall be holding discussions with officials later in January. We have recently been assessed by the IMF which concluded that insurance regulation in Bermuda was ‘highly observant’.”

Elderfield has been CEO of the BMA for 18 months. “My frustration, if you can call it that, is that since the financial crisis blew up I have not had enough time to enjoy the pleasure of learning to sail or to improve my golf game,” he reveals. “And a long time fan of Leeds United FC, I had hoped to meet a rich fund manager who would invest in the club and help it to achieve promotion to the Premiership. But today there seem to be less rich hedge fund managers around.”

David Sandham is Editor of Global Reinsurance

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