Insurance

Key changes in Bermuda’s insurance regime

Anthony Smith, of Conyers Dill Pearman, explains, key changes to Bermuda’s insurance regulatory regime

One of the tasks constantly on the minds of regulators around the world is finding the right balance of regulation – enough to ensure the stability of the market but not so much as to inhibit the proper function of regulated businesses. With that in mind the Bermuda Monetary Authority (BMA) has recently made important changes to Bermuda’s insurance regulation.

Speed to market

In the past the most common way to form and licence an insurance company in Bermuda was to have the company and its business approved prior to incorporation.

The difficulty lay in not having the company incorporated until after the insurance licence had been approved in principle by the BMA’s licensing and authorisation committee. The BMA has recognised that promoters need to have their proposed insurance company in existence at the earliest possible stage to be able to undertake all the other necessary tasks alongside the application process rather than waiting for approval before being able to enter into engagement letters and placing agreements and open bank accounts.

The BMA will now allow insurance companies to be incorporated prior to being approved for licensing by the authorisation and licensing committee. In seeking the right level of regulation the BMA has maintained Bermuda’s reputation of speed to market without compromising on regulatory standards.

Class 3 insurers

Bermuda’s classification of insurers has long recognised the extremely diverse range of underwriting activities conducted by Bermuda insurers and reinsurers.  There have until now been four classes of general business insurers:  Class 1 (pure captives), Class 2 (not more than 20% unrelated insurance business/multiple owners), Class 3 (not falling within the other classes) and Class 4 (excess liability or property catastrophe underwriters capitalised in excess of $100 million).  Each class is subject to its own minimum solvency and other regulations. 

In July 2007 the BMA announced plans to introduce a new risk-based solvency regime for Bermuda’s major commercial insurers and reinsurers. The introduction of risk-based solvency testing for Bermuda’s Class 4 companies was completed earlier this year and the BMA now plans to expand its risk-based supervisory model to the Class 3 insurance sector.

In May 2008 the BMA published a consultation paper in which it outlined a two-phase plan which will initially see a reclassification of the existing Class 3 sector. Once this reclassification has been completed, the BMA intends to introduce a risk-based capital solvency model for newly-defined large commercial insurers. The existing Class 3 sector will be re-classified into three sub-classes consisting of:

• Class 3 insurers (captive insurers writing unrelated business),
• Class 3A insurers (small commercial insurers), and 
• Class 3B insurers (large commercial insurers). 

 In addition, the BMA proposes to establish a new special purpose insurer classification.All existing Class 3 insurers qualifying for reclassification are required to submit a reclassification application to the BMA by December 31, 2008.  Any Class 3 insurer otherwise qualifying for reclassification as a Class 3A or Class 3B general business insurer that fails to apply for reclassification within the prescribed time may have its registration cancelled by the BMA.

New Class 3 insurers (Captive insurers writing unrelated business)

This classification will include those insurers whose percentage of unrelated business net premiums written represents greater that 20%, but less than 50%, of its total net premiums written.  Included in this sector will be most captive insurers writing unrelated business together with rent-a-captives and other segregated accounts companies where the liabilities in each of their cells are fully collateralised or otherwise fully funded.  New Class 3 captives will not be subject to the additional reporting or new solvency or disclosure requirements being introduced.

New Class 3A (small commercial) insurers

This classification will include those insurers whose (i) percentage of unrelated business net premiums written exceeds either 50% of its total net premiums written or 50% of its net loss and loss expense provisions, and (ii) annual unrelated business net premiums written does not, or is not projected to, exceed $50,000,000. Most of the existing Class 3 general business insurers are expected to be reclassified into the small commercial insurer category.

Class 3B (large commercial) insurers

This classification will include those insurers whose (i) percentage of unrelated business net premiums written exceeds either 50% of its total net premiums written or 50% of its net loss and loss expense provisions, and (ii) annual unrelated business net premiums written does, or is projected to exceed, $50,000,000.Under these criteria, 32 out of 504 companies registered as Class 3 general business insurers in 2007 would be reclassified as Class 3B insurers.

Unrelated business

The BMA defines connected business as: "risk which, in the opinion of the BMA, arises out of the business or operations of those persons or any affiliates of any of those persons". For the purpose of the reclassification process, connected business will be considered as related business and will not be included in the unrelated business percentage when determining the appropriate class of registration.

The following are examples of the types of business that have been deemed to be connected by the BMA in the past: credit and credit life; malpractice insurance (or other professional liability cover) of non-employed physicians; employee benefits; risk arising from joint venture projects; warranty; collision damage waiver; care, custody and control; agency business (reinsurance only); and supplier/contractor insurance.

Net premiums written

The 50% unrelated test applies only to an insurer's net writing position after credit for reinsurance ceded. The gross writing position is not considered.  If an insurer is exceeding the $50 million unrelated net premium test then it will be required to re-register as a Class 3B insurer even if such unrelated net premiums are less then 50% of the total net premiums written.

Existing regulatory approvals

All existing regulatory approvals including section 56 directions, relevant asset approvals and other fixed capital approvals will remain in force notwithstanding the reclassification of the insurer.

Sidecars

Existing Class 3 sidecars established with fully collateralised reinsurance policies will not be required to reregister as Class 3A or Class 3B. At this time the BMA will not require existing sidecars or other special purpose type insurance vehicles which were previously registered as Class 3 insurers to re-register as special purpose insurers. However, should any entity wish to avail themselves of this new category of registration, the company will need to make application to the BMA for a change of slass.

Run-off companies

An existing Class 3 insurer which has entered into run-off and is not currently writing any premium will still be required to make application to re-register as a Class 3A insurer if that insurer would qualify as such based on the percentage of unrelated loss provisions included in its statutory balance sheet.

Financial information

All financial information required to determine the appropriate class of registration of any applicant must be based on 2007 or, if available, 2008 audited Bermuda statutory financial statements.  Financial information based on Generally Accepted Accounting Principles will not be considered.

Conclusion   

If it is to continue to be internationally recognised as a leading insurance and reinsurance domicile then it is vital that Bermuda has the regulatory standards and operational capability (both in the private and public sectors) to achieve this goal. These changes will constitute another important milestone in the development of Bermuda's insurance regulatory framework.

For further information please contact Anthony Smith of Conyers Dill & Pearman on Anthony.smith@conyersdillandpearman.com