Jeremy Cox, CEO of the Bermuda Monetary Authority, outlines the implications of Solvency II and the Authority’s new Code of Conduct, and explains that there is much to commend and little to fear from the new measures.
I understand that you are introducing a new code of conduct. What were your motivations behind the new code? What implications will it have for Island captives?
The Code builds upon and codifies the previous guidance on governance standards already established within the jurisdiction and further strengthens the standards of regulation in place for Bermuda’s insurance sector. It was planned as part of the Authority’s continual review of its regulatory framework to ensure its regimes remain effective, and in line with its wider regulatory change programme.
The Code establishes duties, requirements, and standards with which (re)insurers must comply, including the procedures and sound principles firms must observe. Matters addressed in the Code include corporate governance, risk management, governance mechanisms, outsourcing and market discipline and disclosure. Since the Code applies to all Bermuda insurers, it has been drafted to ensure the need to apply proportionality in its application is taken into account; therefore the requirements are commensurate with the size, nature, complexity and risk profile of the insurer.
Therefore, in application the requirements for captives will be proportionate and always correspond to the limited scale and risk profile of such firms. The Authority has provided the market with further direction in this regard, that assists firms with understanding our expectations in terms of adherence to the Code and reaching compliance.
With Solvency II equivalence imminent, how are you looking to differentiate captives within the wider regulatory framework?
We will continue to differentiate the captive sector for regulatory purposes using our risk-based regulatory approach, and based on the typically limited purpose and impact of such firms.
Applying proportionality when regulating captives is essential, and will remain a priority for us moving forward; this will also continue to ensure they are not treated in the same manner as commercial insurers, which would be inappropriate.
How is Bermuda approaching the issue of proportionality and will the BMA take its own stance or follow Europe’s lead?
Our key priority has always been to ensure our framework is right for the wide diversity of firms operating in the Bermuda market. Incorporating proportionality when we apply our risk-based regimes has already been a long-standing and effective element of insurance supervision and regulation in Bermuda, given the various risk profiles of insurers across our market. Therefore, we will continue with this approach.
In practical terms, this means that we calibrate our standards to the range of risk profiles of firms across Bermuda’s commercial and captive sectors. This in turn means that we apply an appropriate level of supervisory requirements and resources to firms, based on their size, nature and complexity. It is interesting to note that our approach is already consistent with the manner in which proportionality has been referenced in relation to the equivalence initiative for Europe.
The Authority recognises that ensuring proportionality in applying its regimes has been a key part of the success of Bermuda’s insurance market. Moving forward, we intend to ensure that Bermuda’s insurance regulations remain pragmatic in application and appropriate for our market.
How is the BMA looking to help captives prepare for the impending regulatory regime?
Consultation with industry is a cornerstone of the Authority’s regulatory development process and equivalence preparations. We have conducted broad consultation with the market regarding our framework enhancements—including the captive sector—to ensure firms understand the relevance of such developments for Bermuda and any implications for their operations and regulatory obligations.
How important is Solvency II equivalence in keeping Bermuda at the forefront of global captive domiciles?
For the Authority achieving regulatory equivalence is not an end unto itself, but rather one element of ensuring that Bermuda’s regulations remain forward-looking and effective. A practical, proportionate regulatory framework will continue to support Bermuda’s position as a premier captive domicile, along with the other core attributes of the jurisdiction, such as the highly experienced service infrastructure in place for captives and the ease of access to quality reinsurers.
"Incorporating proportionality when we apply our risk-based regimes has already been a long-standing and effective element of insurance supervision in Bermuda, given the various riks profiles of insurers across our market."
Overall, the framework enhancements we are putting in place are designed to build on the effectiveness of our risk-based approach to regulation and ensure our framework remains appropriate for all sectors of the Bermuda market. These changes will also ensure our regulations remain consistent with evolving international standards, particularly those related to the International Association of Insurance Supervisors (IAIS), and that Bermuda’s regulatory framework can be recognised as equivalent by other jurisdictions that are important to this market, which includes Europe and the US. Solvency II is the most imminent of external regulatory initiatives of relevance to Bermuda, and so is our focus currently, however, our overriding goal is to ensure we build the best and most appropriate framework for our market.
Is there an expectation in the BMA that Solvency II will establish a global benchmark that other domiciles will be obliged to respond to moving forward?
It is important to remember that global insurance regulatory standards remain the remit of the IAIS. Therefore, if there are any new benchmarks to be set internationally in terms of insurance regulation, they are likely to be generated from the IAIS’s current review of its Insurance Core Principles. The Authority is actively contributing to this review, sharing our experience and expertise to provide technical input to the process. We place emphasis on the need to ensure that global regulatory initiatives promote consistency and risk-based standards across markets, while also fostering effective supervisory cooperation. The standards that are developed should also have a degree of flexibility that can accommodate the risks related to different jurisdictions, market sectors and entities within a market. Risk-based, practical application of standards that achieves desired regulatory outcomes under broad equivalence, i.e. in a manner that is appropriate for the risks associated with markets, should be the goal.
Jurisdictions are assessing the relevance and potential impact of Solvency II depending on the nature of their markets. This means there will be some differences in how the directive is viewed across various jurisdictions, and clearly it will be more relevant to those with insurers that conduct a significant amount of business with the European market.
There is a general recognition among regulators of Solvency II being just one aspect of the general regulatory reform initiatives that are currently taking place internationally. The directive has a role to play within the global regulatory arena in terms of supporting and fostering higher standards. However, the IAIS remains the chief international standard setter for insurance sector regulation.
Do you foresee Solvency II equivalence being a draw for new global captives considering Bermuda and, if so, why?
The core benefits of Bermuda to captive firms remain: practical, riskbased regulation; depth of market experience in managing captives; direct access to a sophisticated commercial reinsurance market allowing for open-market underwriting capacity; a rigorous but efficient licensing regime that recognises speed-to-market; and a collective commitment in Bermuda to conducting quality business. Overall in terms of regulation, Bermuda will remain attractive to captive firms wishing to conduct their business from a jurisdiction that maintains a sophisticated, quality regulatory environment, continuing to effectively balance practicality for the market with compliance with international standards.
Jeremy Cox is the chief executive officer of the Bermuda Monetary Authority. The BMA’s website is: www.bma.bm
Bermuda, BMA, regulation, captive, insurance, Solvency II