Geared for Growth: Bermuda’s Regulatory Framework

Bermuda’s regulatory framework has evolved to support ILS growth and innovation potential. This will be invaluable in helping the Island adapt to life after COVID-19, whatever that looks like, say Sarah Demerling, head of market intelligence, and Anna Pereira, head of overseas market and promotion, at ILS Bermuda.

The Bermuda Monetary Authority’s (BMA) regulatory change programme is based on its strategic vision to drive the evolution of insurance regulation and support the Island’s leadership position and reputation as a jurisdiction for insurance-linked securities (ILS). From a solid foundation and continued effort to enhance the regulatory framework, the BMA has significantly advanced its policy development agenda and regulation.

Consultation with market participants remains central to the development process and assists firms with transitioning to enhanced regimes. Feedback from stakeholders has supported the transition process for the market as global requirements have evolved.

The high level of interaction with market participants across the insurance and reinsurance industry has kept the regulatory change fluid and effective and been a boost for Bermuda.

The BMA continues to support international supervisory cooperation through dialogue with regulators around the world which demonstrates the overall commitment to ensure Bermuda’s framework remains aligned with relevant international standards.

This concerted effort has resulted in enhanced regimes that are aligned with evolving international standards, while remaining practical, proportionate and effective.

Regulatory equivalence remains a key strategic goal for the BMA and the progress achieved to date on the framework enhancements ensured Bermuda was one of the first non-EU jurisdictions to achieve Solvency II equivalence.

The BMA remains committed to achieving and maintaining Solvency II equivalence with international standards and best practices for insurance supervision for the benefit of Bermuda and the insurance and reinsurance industry. In addition, the BMA has been granted Reciprocal Jurisdiction Status by the National Association of Insurance Commissioners.

The BMA maintains the appropriate resources to implement targeted technical needs to support the execution of regulatory and supervisory goals. An important focus has been on evolving technologies such as regtech and suptech to support the BMA’s effectiveness, which has yielded promising results and efficiencies such as firms electronically filing submissions. The objective remains to use technology strategically to create greater efficiencies, richer data analysis and improved reporting capability by the BMA.

These actions placed Bermuda in good stead during the COVID-19 pandemic where remote working became the norm.

Bermuda is no stranger to natural disasters and embracing change as a result of their impact—it is what the Island is known for. Speed to market and the ability to react quickly when opportunities arise are part of the Bermuda insurance and reinsurance industry’s DNA.

 

Responding to Coronavirus 

In a webinar titled “Clarity in Changing Times: Bermuda’s Response to Tackling the COVID-19 Crisis”, Craig Swan, deputy chief executive officer at the BMA, quoted Winston Churchill who said: “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.”

With this mantra, the BMA was able to be very responsive with international best practices and ensure a seamless transition to a virtual working environment during the early stages of the global pandemic without compromising productivity, while approving and registering new structures and meeting filing deadlines.

The global pandemic was uncharted territory, but Bermuda’s risk transfer market did not miss a beat. The BMA quickly provided the market with very clear communications on how they wanted participants to interact with the authority, as did the Bermuda Registrar of Companies, which switched to providing access to online search facilities within a matter of days.

The Bermuda government issued regular press comments and provided clear guidelines to residents and companies ensuring collaboration and cooperation between public and private sectors. Along with government’s effective management of key considerations to contain the spread of the virus locally, the international business sector cooperated with a sense of teamwork and initiated business continuity plans and dedicated time, effort and resources to recovery and maintaining resilience.

The BMA understands and acknowledges that Bermuda has a unique position as the only jurisdiction in the world that has a leading position in reinsurance, ILS and captive insurance, as well as the vital role the sector plays in aiding global economic recovery.

 

Innovators 

The uniqueness of Bermuda’s regulatory environment fosters the quick response to the development and delivery of products and the formation of new startups. In this favourable environment for innovation, combined with risk transfer expertise and efficient capital, carriers will be looking for pandemic solutions.

The evolving regulatory environment in Bermuda offers a framework for adaptability and potential for innovative products to help manage global uninsured and underinsured risks, known in the industry as the “protection gap”.

Since 2009, with the BMA’s introduction of special purpose insurer (SPI) legislation, the alternative risk transfer market—aka the convergence industry—Bermuda has gained global recognition in the ILS industry and has benefited from its experience and leadership with practical, forward-looking risk-based regulation for insurance frameworks.

This acted as a catalyst for the supporting and listing of global ILS vehicles on the Bermuda Stock Exchange.

The ILS asset class, now tried and tested through severe catastrophes, financial market disruptions and the global pandemic crisis, has proved to be a low correlated asset class and further enhanced the opportunities for regulated exchange traded risk.

The low beta features and resilience of ILS act a hedge to a broader portfolio of investments. The attractiveness of the asset class has not gone unnoticed by other jurisdictions including London, Singapore, and Hong Kong.

As more jurisdictions enter the market, it will broaden and expand the risk transfer pool, helping to narrow the protection gap for underinsured natural catastrophe exposures around the world. Bermuda is well placed with an admirable record of partnership between industry, regulator and government to respond to new exposures when needed.

 

Specific Solutions

Even in times of pandemics and crisis, investors are looking for solutions for specific outcomes. There is a rapidly growing interest in sustainable investing and environmental, social and corporate governance/impact-driven strategies in multi-asset solutions.

ILS is a good example of this as an asset class. As a result of this commitment, as well as other factors, Bermuda is seeing increased inquiries for information on the incorporation of Segregated Account Company structures, particularly the new Incorporated Segregated Account Company (ISAC) structures where each segregated cell is a separate legal person.

The capabilities and opportunities increase the breadth and depth across alternative investment industry markets as participants understand both capital markets and insurance.

Bermuda remains at the forefront of providing innovative solutions to the insurance industry, in part by adapting its regulatory regimes to align with industry developments such as the ongoing evolution and transformation of ILS.

In February 2019, the Insurance Act was amended to provide for a new collateralised insurer class. In a consultation document, the BMA explained that the new class of collateralised insurance (CI) and limited purpose insurer (LPI) is the result of the increasing scope and sophistication of the ILS and collateralised re/insurance market.

The BMA said the new classes of LPIs cater to the evolving market which involves more complex structures and deals including using leverage and transacting with a greater variety of cedants, including unrated non-affiliated cedants.

The CI class is primarily driven by the need to introduce a dedicated ILS insurance vehicle with operational flexibility to cater for the continuing evolution and transformation of the ILS product, structures and origination models. A fair share of simple ILS transactions such as catastrophe bonds will continue to be registered as SPIs.

The new CI class caters for complex but fully funded ILS structures and deals including (i) a desire to fund part of the collateral by purchasing high quality outward reinsurance; (ii) the ability to take on more investment risk than is otherwise allowed in an SPI; and (iii) trade on a primary/direct basis including unrated policyholder/cedants and engaging in more complex ILS deals, eg, retroactive or legacy capped covers and structured casualty ILS.

Bermuda’s regulatory regime offers a one-stop shop with one regulator for both insurance and fund products. When jurisdictional shopping, enhancements to legislation and regulation have helped level the playing field for Bermuda, in particular as it relates to traditional funds. For ILS funds, Bermuda is the preferred jurisdiction and is currently uniquely positioned to cater to both the US and the European markets.

Bermuda is a service economy with real value in high quality, efficient capacity known to quickly adapt to change. The expectation is that leaders will gain competitive advantage by maintaining and enabling an environment for the free flow to high quality capital with prospects for innovation. Innovation and technology go hand in hand when adapting to market disruptions and challenging economic environments.

 

Emerging Tech 

The Bermuda government has also sought to provide legal certainty with the adoption of legislation designed to attract companies using emerging technologies such as fintech, regtech and insurtech.

These include the Digital Asset Business Act 2018 (DABA) (governing conduct of digital assets business activities) and the Digital Asset Issuance Act 2020 (governing issuances of digital assets for fundraising purposes).

With the benefit of myriad structures and corporate vehicles, such as ISACs, Bermuda is well placed to provide a flexible but well-regulated environment in which businesses using innovative technologies can thrive.

Through DABA, the BMA regulates digital asset business activities and imposes international standards and best practices on licensed undertakings, including anti-money laundering and anti-terrorist financing, fraud prevention, valuation manipulation and the fitness and propriety of beneficial owners and controllers.

The regime includes minimum criteria for licensing, as well as a code of practice, statement of principles, client disclosure rules, prudential standards, annual returns rules, accounts rules and cybersecurity rules.

In the insurtech space, the BMA has created a regulatory sandbox that encourages innovation among insurers and intermediaries. Institutions using emerging technologies within their business model, and looking to establish proof of concept, can apply for a sandbox licence, with modifications to the full licensing criteria possible during the period of the sandbox licence.

The industry is seeing and can expect to see a proliferation of products incorporating the internet of things, artificial intelligence, smart contracts, digital assets and blockchain. The BMA’s experience and expertise in machine learning and regulation of insurtech, digital assets and other business models incorporating distributed ledger technology has prepared the regulator and industry for whatever comes after COVID-19.

With a view to fostering innovation, the BMA has also established the Innovation Hub where entrepreneurs can bring ideas to the BMA and receive guidance on how to bring these ideas to fruition.

The BMA ensures that Bermuda’s regulatory framework remains under frequent review to adequately address risk and capital adequacy while at the same time supporting financial industry innovation and potential for growth.

With more than 70 years of history in the business of global risk transfer, Bermuda understands that jurisdictions that are quick to adapt will gain competitive advantage, remain relevant and be better positioned to provide solutions to developing and emerging risk where innovation will play a vital part of the recovery from global catastrophes.

 

This article first appeared in the Bermuda Insurance Magazine.