Bermuda Monetary Authority: Raising the bar—BMA introduces new risk-based capital standard for insurance companies 03/08

Bermuda Monetary Authority: Raising the bar

BMA introduces new risk-based capital standard for insurance companies

By Michael J. Moody, MBA, ARM

The past few years have seen an increased emphasis on corporate transparency, not just in the United States, but internationally as well. While there are numerous reasons for this renewed interest, corporate entities worldwide have been going to great lengths to provide proactive governance via complete transpar-ency. And in most cases, it has fallen to the various regulatory bodies to assure that a consistent approach to this effort is provided as well as to monitor its compliance. Some regulators such as the Bermuda Monetary Authority (BMA) believe that it is important to provide an approach to its own transparency that is similar to the transparency it requires from the entities it regulates. As a result, BMA has recently introduced its outline for change in the 2008 BMA Business Plan.

Risk-based regulator

The BMA introduced its key regulatory initiatives and business goals in the plan, which demonstrates the BMA’s commitment to transparency and explains to stakeholders BMA’s future work program. Among the key aspects of the business plan is the introduction of a new risk-based capital standard for insurance companies. It also includes details about the BMA’s efforts to develop standards for insurance groups.

According to BMA Chief Executive Matthew Elderfield, “We are a leading market and we need to be a leading regulator to match.” But, as he points out, “we don’t need to have a cast of thousands to be effective.” In fact, that’s the whole idea behind the risk-based approach that Bermuda is taking. The Authority realizes that certain lines and classes of business are inherently riskier than others. And it’s these riskier classes of business on which the Bermuda regulator will be concentrating.

With regard to this risk-based approach, Elderfield points out that “solvency is the key issue.” In that regard, the BMA has restructured its internal operations to zero in on solvency-related issues. The BMA believes that capital adequacy should properly reflect an insurer’s risk profile and take into consideration the nature and complexity of the business it writes. In order to assist the BMA in this effort, Elderfield points out that the Authority has introduced a risk-based capital model known as the “Bermuda Solvency Capital Requirement.”

He notes that the model will assist in measuring risk as well as determining the appropriate capitalization. Elderfield states, “This is a formal, internal risk-based model which will measure a firm’s impact based on its capital.” It will also determine the probability that problems will occur. By definition, emphasis will initially be concentrated on Bermuda’s larger, Class 4 insurers and reinsurers.

The Bermuda Class 4 companies are the bigger companies. Most are international and include 15 of the world’s 20 largest reinsurers. And, as Elderfield points out, “this is where the attention is needed.” He goes on to say that it’s about the wholesale risks, the solvency risks, and “it’s the big boy risks.” While the emphasis is currently on the Class 4’s and a few Class 3’s, one of the things that the BMA has become aware of is that some Class 3 companies look surprisingly like Class 4’s. As a result, Elderfield indicates that BMA will be taking a closer look at the whole Class 3 issue.

“We realize that the Class 3 definition is very broad and contains many diverse types of companies,” Elderfield notes. Accordingly, the BMA will “need to decide how to slice this segment to better reflect the proper class of risk,” he adds. The BMA will actively be working on the Class 3 issue throughout 2008. Once the Authority has determined a recommended approach, it will work with interested parties to develop a more appropriate classification or classifications.

Other aspects

Clearly, the major thrust of the new BMA business plan is directed at the revised risk-based approach for the larger group companies. By developing a standardized solvency model that includes stress testing, the BMA will be able to effectively monitor the larger Class 4 and 3 companies.

But what about the smaller captive insurance companies? Elderfield says that the regulators believe that the captive market requires “a lighter touch.” While Bermuda is clearly raising the bar for large group companies, BMA is not interested in over-regulating those companies “where we see risks and where we feel the approach to those risks is appropriate.” Accordingly, he says, “For the captive market, we are not planning any changes.”

In addition to the insurance industry, the BMA also is responsible for banking, trust companies and investment companies; and the Business Plan provides details regarding efforts in these areas as well. One of the more important areas concerns the standards for anti-money laundering (AML) and combating the financing of terrorism.

In essence, the BMA’s role regarding AML will expand from monitoring financial institutions for compliance to one of enforcing compliance through penalties and other measures delineated in criminal and anti-terrorism finance regulations. As part of this expanded role, it is proposed that the BMA will have powers to impose civil penalties for those that breach the regulations. The BMA is currently drafting new legislation that will support this expanded role.

The year 2009 is an important one. It marks the 400th anniversary of the settlement of Bermuda by Sir George Somers, a British explorer. The BMA will use this occasion to launch the first complete redesign of Bermuda’s banknotes. The remainder of 2008 will be used to plan for the design and issuance of the new notes. One of the issues that is of critical importance is to better combat counterfeiting by increasing the security features.

Another important area of the Business Plan is the discussion of the BMA’s professional staff. Reflective of its increasing responsibilities is the growth of the staff from 62 people in 2002 to the current number of 108. But, as Elderfield notes, “while the staffing has increased, the skill mix has changed as well.” The Authority has added an actuarial team, a special risk team, and a non-compliance team—all of which are necessary due to the size of the market BMA is required to supervise. “We are still looking to build up additional staff,” says Elderfield, but even at this point in time, “from an operational standpoint, we are in pretty good shape to meet our overall supervisory obligations.”

Summary

Bermuda has worked hard to establish its position as the world’s leader in the ART market. Today there are more than 1,400 insurance companies on the island with total assets of $440 billion and $115 billion in gross premiums. Not satisfied to sit on their laurels, however, Bermuda regulators are moving forward aggressively with plans for a cutting-edge, risk-based regulatory regime.

As Elderfield points out, “We are trying to take an enlightened approach by raising the bar in a risk-based manner.” A review of the new business plan shows the comprehensive nature and depth of the current changes. Building on the new risk-based approach, it would appear that Bermuda has once again raised the bar with regard to appropriate regulatory oversight.