5 June 2015Bermuda analysis

Pragmatism meets innovation

Shelby Weldon, director, licensing and authorisations at the Bermuda Monetary Authority (BMA), the integrated financial services regulator in Bermuda, has been involved in the regulation and supervision of Bermuda’s insurance industry since 1995. He served as the Inspector of Companies in the Bermuda government’s Registrar of Companies Department until 2001 when the insurance regulatory function was transferred to the authority. In 2006 he was promoted to the director level and is currently a member of the BMA executive team.

Given his background and the depth of his experience, Weldon has seen much change in Bermuda over the past 20 years. Commenting on the past decade and his experiences in his current job in particular, he says that he believes 2005 was a watershed year for the jurisdiction. In the aftermath of hurricanes Katrina, Rita and Wilma and the dearth of capacity that followed, a wave of reinsurance start-ups chose Bermuda as their preferred domicile.

They brought a significant amount of capital, expertise and ambition and, according to Weldon, helped establish Bermuda as the international jurisdiction of choice for large-scale global risk transfer.

“For me, that was the year that Bermuda really became established in the minds of the industry as being a significant international reinsurance centre,” he says. “We were already very strong and the domicile of choice in terms of captives but that wave of capital and start-ups took us to another level.”

With great power came responsibility, however, and the next decade was characterised by an acceleration towards a more global set of regulatory standards and a shift towards risk-based supervisory principles. Weldon says Bermuda took the approach early on to take a lead in this process of change.

“In the past 10 years there has been an evolution of international regulatory standards and we have been focused on demonstrating that our supervisory approach is in accordance with those international standards. There was the question of how we would respond to that and we took the conscious decision to get actively involved in the standard-setting bodies so that we had some influence in how those standards evolved rather than being simply dictated to.

“We have been through a period of increased scrutiny with respect to our regime and our methods and standards have evolved accordingly. Because of our high standing in the global financial services industry, it has been possible to be a thought leader and help influence that process in many ways.”

New resources

A practical implication of this change has been the need for the BMA to enhance its resources from both numbers and expertise perspectives. “We have needed to make a big investment in people,” he says. The number of staff has tripled in the past 10 years.

More recently, this process of regulatory change has further crystallised as a result of Bermuda seeking equivalence under Europe’s Solvency II directive. Equally important was the fact that the BMA also avoided the directive being applied to the regulation of captives on the Island, maintaining one of Bermuda’s biggest competitive advantages.

“Securing equivalence with Solvency II is critically important to us. We want to be acknowledged as a first class regulatory regime that can stand up to scrutiny of any kind. The BMA’s excellent reputation overseas is indicative of the regulatory approach we have taken in recent years,” Weldon says.

He says one reason for Bermuda’s success in re-tooling its regulatory and supervisory approach has been a robust consultative process with the government, regulated institutions and the service provider community. This has always been one of Bermuda’s strengths, and the Island’s small geographical size gives it a collaborative advantage which has paid dividends in recent years.

“We are a small country and sectors such as financial services have always been very important to our financial stability. As such, we have worked together with the business community to ensure our regime not only stands up to international scrutiny but is also fit for purpose for the nature, scale and complexity of those financial service businesses operating in or from within Bermuda.

“There can be a lot of to-ing and fro-ing between stakeholders at times but that ensures that the authority is not only developing regulations that are practical and pragmatic but also that we continue to protect the stellar international reputation of the Island,” he says.

"We are certainly assisting in the evolution of a market that could ultimately change the very nature of risk transfer globally.”

Bermuda’s dominance in the captive space was achieved on the back of innovation and a flexible regulatory approach taken in the 1960s and 1970s when the sector first started to flourish on the Island. But history may be repeating itself—especially in the fast-developing area of insurance-linked securities (ILS). Bermuda is the domicile of choice for this rapidly growing market and represented 60 percent ($15.1 billion) of total outstanding ILS capacity at the end of 2014.

“Bermuda has shown real leadership in the ILS space,” Weldon says. “When you add that to the fact that we are the premier jurisdiction for captives in the world and one of the top three for reinsurance, you can see that this type of innovation and leadership truly works.

“The BMA prides itself on being pragmatic as a regulator and willing to try and find solutions rather than problems. The fact is that 30 to 40 years ago, captives were considered innovative and cutting-edge in the same way that ILS is now. We are certainly assisting in the evolution of a market that could ultimately change the very nature of risk transfer globally.”

The funds and investments space, Weldon says, is another rapidly growing area where Bermuda is hoping to take a leadership position.

Widening the reach

The Island is also increasingly attracting business from other geographical regions. There have been notable efforts from various Bermuda bodies—from ministries within the Bermuda government, to the Bermuda Business Development Agency (BDA) and industry associations such as the Bermuda Insurance Management Association—to attract more business from Canada and Latin America in recent years.

Weldon acknowledges this and says the regulator is on board both to monitor the risk and also to assist in the jurisdictional effort to tell the Bermuda story overseas.

One other notable example of innovation that Weldon mentions has been the creation of Africa’s first ever catastrophe insurance pool, African Risk Capacity Insurance Company Limited, which is a Bermuda-based captive structure.

“This is a very innovative formation that has already paid out over $20 million to help food-insecure populations deal with the impact of extreme weather events,” he says.

The biggest challenge the BMA constantly faces, Weldon acknowledges, continues to be the development of regulatory regimes which adhere to international best practices while maintaining a regulatory environment that remains workable for the firms which operate here. “It is a fine line we must walk,” he says. “Regulation and maintaining very high standards will always be our first priority. Bermuda’s reputation is everything and the BMA is very interested in the quality of the companies and entities domiciling here. You see a lot of press around the number of new entities being formed in some domiciles but we are always more interested in quality than quantity and finding good, long-term business partners for the Island.”

He adds that in relation to the captive sector specifically he is committed to ensuring the regulator remains engaged with industry bodies. Following a trial run in 2013, new rules will be introduced by the BMA this year, to collect better data about Bermuda’s captives—something he believes will be used long term by industry and the BDA to further market the sector and offer better information about the scale and financial stability of the captives based there.

“Our customers want certainty and stability and it is our job to employ skilled regulators who also have business sense and the ability to find solutions. There will always be challenges but if we can continue to combine this stability with innovation Bermuda has a bright future.”