The Bermuda life insurance market has grown rapidly. Assets increased to $1.1 billion as of YE2022 from $496 million in 2018, and the number of life insurance licenses increased 10% over the same period to 180. This growth has been driven by its economic-based regime, along with its Solvency II equivalence and NAIC reciprocal jurisdiction status
New York:
Regulatory reforms recently enacted by the Bermuda Monetary Authority (BMA) are supportive of insurer credit profiles, said Fitch Ratings .
The reforms bolster capital requirements, supervision, and granularity of risk assessment to strengthen market stability and transparency.
The recently enacted changes were first introduced in a 2023 consultation paper and have led to material increases in pricing, fees and higher required capital.
“While we expect the majority of insurers to remain in Bermuda, some on the margin may prefer other regulatory regimes with less strict capital standards,” said Fitch.
Fitch views regulatory arbitrage unfavorably and assesses companies on a consistent basis within its proprietary capital model, Prism.
Notable updates to the regulatory regime include increases to reserve discount rates, assumed default rates and lapse rates, more restrictive asset selection, along with more granular governance and risk management.
The BMA will also require more transparency around transactions as part of its approval process. Additionally, in 2023, the 15% Bermuda Corporate Income Tax Act became law and will be implemented in 2025, which remains lower than the U.S. rate and is not expected to have a material effect on insurers.
Reflecting the growing and evolving market, the updates center around ensuring that the BMA’s insurance regulations remain sufficiently transparent and fit for purpose, while maintaining its Solvency II equivalence and NAIC reciprocal jurisdiction status.
The Bermuda life insurance market has grown rapidly. Assets increased to $1.1 billion as of YE2022 from $496 million in 2018, and the number of life insurance licenses increased 10% over the same period to 180. This growth has been driven by its economic-based regime, along with its Solvency II equivalence and NAIC reciprocal jurisdiction status.
The Bermuda Solvency Capital Requirement calculation capital requirements are now more risk sensitive, with lapse and expense-risk components separated and stress tested, with the most adverse scenarios applied to capital requirements. To determine the risk capital requirement, shocks used increase all expense assumptions and expense inflation rates (by absolute basis points).
The BMA expects Bermuda insurers to primarily fund long-term liabilities with unaffiliated investments. The BMA now requires prior approval of all investments having counterparty credit exposure to affiliated entities. This includes investments held on balance sheet, in addition to assets held in modified coinsurance and funds withheld reinsurance agreements on the cedant’s balance sheet.
As of Jan. 1, 2023, the BMA has the regulatory authority to reject any reinsurance transaction, and supervisory tools including asset composition and assumptions. The BMA is also likely to analyze transaction pricing and liability assumptions, including under a baseline and stressed environment.
The BMA now requires detailed documentation on modelling, data used in calculations, and internal controls, highlighting its emphasis on governance.
Additional updates around the Scenario Based Approach (SBA) include enhanced modelling, governance, validation, stress testing, and reporting requirements to ensure the BMA maintains a robust regulatory framework review process to protect policyholders in an evolving market. The SBA reflects illiquidity premiums embedded in asset yields in discount curves of liabilities.
Insurers’ liabilities must demonstrate predictable and stable cashflows across various scenarios and must be matched with suitable fixed-income assets with predictable and stable cash flows.
As illiquidity premiums coincide with investment spread not attributable to credit risk, default and downgrade costs will be applied through a negative adjustment to the investment spread. Default and downgrade costs will be based on long-term historical data and should not fluctuate materially year over year.
The BMA has focused on discount rates in the context of asset-liability management. Insurers are now required to dynamically model lapses under eight interest rate scenarios, which are accompanied by real-world asset sales and purchases, in contrast to the previous static approach.
Lapse risk is a major factor within the SBA due to mass lapses potentially forcing insurers to sell assets at unfavorable prices to meet increased policyholder obligations.