Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda — Bermuda

5  Insurance

5.1  Introduction

The International Association of Insurance Supervisors (IAIS) has produced a number of principles and standards set out in a series of papers and approved by its members.

These standards recognise that the regulatory framework for insurance supervision varies from country to country and are not mandatory and do not necessarily reflect current practice in all of the member countries. The principles and standards are intended to represent a target for supervisors to work towards and can be implemented in a flexible manner, depending upon the circumstances of each jurisdiction.

The Offshore Group of Insurance Supervisors (OGIS) has also introduced a set of principles, standards and guidance notes upon which self-assessment is required. Conditions of membership of this group include, having legislation in place which enables its regulatory authority to adequately supervise insurance business by having the necessary resources and properly qualified supervisory personnel to enforce the legislation.

Of the territories under review, the British Virgin Islands, the Cayman Islands and the Turks and Caicos Islands are members of OGIS, with Anguilla having observer status. Bermuda is an active member of IAIS directly and not a member of OGIS.

The Terms of Reference for this review require us to assess performance against International Standards and good practice in the insurance sector.

It is against these standards that we have made our assessments. The areas where it is considered that development may be required are contained in the issues and recommendations section of this report.

5.2  Type and scale of activity

Bermuda has an extensive international insurance sector comprising captive insurance companies, life insurance companies and some of the largest catastrophe reinsurance companies in the world, in addition to the domestic insurance market. Bermuda dominates the captive insurance market with gross annual premiums of US$ 27 billion and total assets of US$ 115 billion. Captive businesses represent approximately 75% of the Bermuda insurance register and as self-insurers, captives do not generally deal with the public. The Bermuda market is not a significant retail market, but primarily captive and reinsurance business. As self-insurers captives do not, generally, deal with the public but rather operate business to business.

The Registrar of Companies, who undertakes insurance regulation in the jurisdiction, has supplied the following statistics regarding the total number of companies operating in different sectors as at 31 December 1998:
Long-term international life/composite insurers 134
Domestic insurance companies18
General insurance (mostly captives and reinsurers) 1,293
(Re)insurance companies (excess liab. / property catastrophe) 12

In terms of regulation no distinction is made between insurance and reinsurance companies.

General insurance

General insurance companies can be further broken down as follows:
Class
1
Single parent captive insurance companies owned by one or more affiliates of a group and underwriting only the risks of the owners.
2
(a)  Multi-owner captive insuring the risks of its owners or affiliates of its   owners.

(b) A single parent and multi-owner captive insuring the risks related to or arising out of the business or operations of the owners and affiliates, and/or deriving up to 20% of its net premiums from unrelated risks.

3
Insurers and re-insurers writing finite risk business direct third party insurance and captives deriving more than 20% of net premiums from unrelated risks, rent-a-captives and commercial carriers.
4
Insurers and re-insurers underwriting direct excess liability insurance and property catastrophe reinsurance risks.

5.3  Factual assessment

5.3.1  Legislation

Bermuda has a substantial body of legislation in place to govern the insurance sector which is set out below. Amendments and revisions to legislation take place in consultation with the Insurance Advisory Committee which comprises both public and private sector representatives.

Bermuda insurance legislation covers both domestic insurance and offshore insurance. Whilst the legislation covers both sectors, Bermuda has responded to the different requirements by providing limited discretion in relation to assets and capital adequacy subject to minimum capitalisation in respect of each different class of licence issued.

5.3.1.1  Insurance Act 1978

The Insurance Act covers the registration of insurance companies, licensing, regulation, powers of the Minister, insolvency and winding-up of insurance companies.

Each class of licence is based on the risk factor of the company operating within the definition for the class of business transacted and therefore requires different levels of capitalisation.

The law requires every insurer to appoint and maintain a principal representative and office in Bermuda. The principal representative is required to ensure that the company he represents complies with the law and to report events which would adversely affect the viability of the insurers.

5.3.1.2  Insurance Accounts Regulations 1980

The Insurance Accounts Regulations 1980 are arranged in three parts:

  • Schedule II which advises on matters to be set out in the notes to the financial statements; and

  • Schedules III, IV and V which provide instructions relating to the statutory accounting treatment of items affecting the various statutory financial statements.

5.3.1.3  Insurance Returns and Solvency Regulations 1980

The Insurance Returns and Solvency Regulations cover general business and long-term business solvency margins, the minimum liquidity ratio for general business insurers and details of other criteria required for compliance with the Insurance Act 1978.

5.3.1.4  Proceeds of Crime Act 1998

The Proceeds of Crime Act covers long-term insurers as regulated institutions and generally provides for such insurers to report money-laundering activities.

5.3.1.5  Life Act 1978

The Life Act deals with the procedures to be undertaken in the life insurance industry including policy conditions, rules and regulations.

5.3.1.6  The Non-Resident Insurance Undertakings Act 1978

The Non-Resident Insurance Undertakings Act permits non-resident insurance companies to transact domestic business within Bermuda.

5.3.1.7  The National Pension Scheme (Occupational Pensions) Act 1998

The National Pension Scheme (Occupational Pensions) Act has recently been enacted. It deals with insurance-related pension business and pension fund management rules and regulations. These are not the responsibility of the insurance regulator, and as such, fall outside the scope of this review.

5.3.2  Rules, regulations and guidance notes

The Insurance Accounts Regulations set out detailed instructions for the completion of the necessary forms required under the Insurance Act.

The regulations are very specific and require the provision of detailed financial information. Considerable emphasis is placed on review of financial reporting documentation by the Registrar of Companies.

No specific guidelines exist. All guidance for the completion of reporting forms and compliance certificates is included in the Insurance Act and Regulations. It is not expected that any new guidelines will be issued other than by amendment to the Insurance Act or Regulations. The Regulations contained in the legislation are detailed and specific. Regular communication takes place with managers and insurers on matters of policy.

5.3.3  Supervision - systems and procedures

5.3.3.1  Application process

Licence applications require detailed information on shareholders and directors, a complete business plan, financial projections and re-insurance programme and an actuarial report, where appropriate, and/or a loss history supporting the five year financial projections provided in the application.

A Certificate of Compliance is required from a home state regulator for a new application from an overseas company wishing to set up a subsidiary in Bermuda. Where a Bermuda company wishes to set up a subsidiary company overseas, the Registrar considers it the responsibility of that jurisdiction to decide to licence or otherwise but is willing to provide adequate confirmation supporting the company's existence and compliance with the Insurance Act 1978.

Following approval of a licence application, regulation is based upon annual financial reporting and returns. Considerable emphasis is placed on the licence application. Amendments to the business plan are not required as approval for another class of licence must be sought from the Regulator.

Changes to the business plan which occur in any company in the normal course of business are not required to be notified to the Registrar, other than where they are material and materially affect the insurer's operations, or impact on the ability of the insurer to comply with the regulations of the Insurance Act, or they would cause the insurer to change its class of licence.

Ongoing supervision is largely focused on prudential matters and is facilitated in the first instance through the annual filing of a statutory return, which is accompanied with an opinion from an approved independent auditor and the opinion of an approved loss reserve specialist and/or actuary, where applicable.

5.3.3.2  Segregation of business

The Legislation does not prohibit an insurer from undertaking business other than insurance or from owning companies transacting commercial business. The Insurance Act, however, requires separate accounts and segregation of assets and liabilities of the insurance business from other business.

5.3.3.3  Scope of regulation

Company management and internal procedural controls are the responsibility of both the principal representative and the insurance manager and amendments to the business plan are not notified to the regulator in all cases.

Prior to approving a change of shareholders or ownership relative to an insurance undertaking, the BMA will consult with the Registrar of Companies as to whether or not they have any objection.

5.3.3.4  On-site supervision

The Department of the Registrar of Companies does not carry out any on-site inspections itself. Instead considerable reliance is placed on the work of the independent auditor's inspection of the company's books and records.

5.3.3.5  Off-site supervision

Off-site reviews are based on the detailed analysis of annual statutory financial returns by the department of the Registrar of Companies.

Investments permitted for inclusion to meet statutory solvency and liquidity requirements are detailed in the Insurance Act. While each investment decision is not overseen by the regulator, the requirements of the Insurance Accounts Regulations 1980 and the relevant assets requirements of the Insurance Returns and Solvency Regulations 1980, together with the obligations of the approved principal representative and the independent auditor combine to provide guidance and examine the risks to solvency in relation to investment activity.

Whilst the valuation and safeguarding of assets are the responsibility of the Board of Directors, the reporting of compliance with the Insurance Act and associated regulations lies with the principal representative.

Re-insurance programmes are reviewed at the time of licence application and not thereafter by the Registrar unless notified by the principal representative or manager of any material inadequacies in the programme. It is the principal representative's duty to review the re-insurance programme and report any adverse conditions to the regulator.

It is the responsibility of the auditor to confirm the re-insurance receivables are valid and collectable. It is the responsibility of the principal representative to ensure that the re-insurance programme is both adequate and in force. In addition, the Registrar must be satisfied that this is the case.

5.3.4  Enforcement - systems and procedures

The various sections of the Insurance Act 1978 provide a wide range of enforcement powers. The regulator has the power to investigate and intervene in the activities of a licence holder; this power is utilised when required. The Registrar also has the power to withdraw a licence for reasons outlined in the Act and the power to amend licence conditions and restrictions. In addition to the Registrar's ability to present a petition for winding-up to the courts, the Minister of Finance may also direct the Registrar to petition for the winding-up of a company if the court considers it just and equitable for it to be wound-up.

5.3.5  Policyholder protection schemes

There are no policyholder protection schemes in force in the jurisdiction.

5.4  Issues and recommendations

5.4.1  Introduction

Bermuda has attracted major world-wide re-insurers in addition to having a leading role in the captive insurance industry. This makes the regulation of insurance a critical area to the jurisdiction.

5.4.2  Reliance on the work of third parties

On an ongoing basis regulatory controls are implemented mainly through the principal representative or insurance manager with whom the Registrar has regular contact. These specialist insurance management companies, owned or associated with international insurers or insurance brokers manage the offshore captive insurance companies.

As a result of this approach, considerable responsibility remains with principal representatives, insurance managers and also the auditors who are responsible for opining on the statutory accounts, the solvency certificate and the declaration of the statutory ratios.

We therefore suggest that the legal requirement to report events which would adversely affect the viability of the insurance company, be extended to include insurance managers and auditors.

5.4.3  Change to a business plan

In the application process a business plan and financial projection is required to be in place and approved by the Registrar. However, there is no subsequent requirement for all amendments or changes to be notified to, or approved by, the Registrar other than those described in section 5.3.3.1 above.

In a number of other jurisdictions it is a requirement for companies to not only notify the regulator of any changes to their business plan, but to obtain prior approval of the regulator before making such changes. Furthermore, we believe that, as the term material, as referred to in section 5.3.3.1 above, is not defined in the insurance legislation it is open to varying degrees of interpretation.

We therefore recommend that, as a minimum, all amendments and/or changes to the business plan submitted at the time of the application should be notified to the Registrar immediately so that he is aware of such changes and can obtain further information if he so requires. Furthermore, we recommend that business plans should be updated annually with revised financial projections and that these should be discussed with the Registrar.

5.4.4  On-site inspection

There has been a recent move, internationally, towards more on-site inspections for insurance companies, limited in some jurisdictions and well established in others. The Bermuda approach has been to rely on the audit process and reporting procedures because it is felt that these procedures provide the information that would be obtained from an on-site inspection.

We consider that on-site inspections should extend beyond purely prudential matters. Furthermore, we believe that, where functions are outsourced to independent agents, the work should be subject to specific guidance from the regulator and be adequately supervised. In our opinion, the current supervisory regime for insurance does not fully meet these criteria.

5.4.5  Reinsurance programmes

All insurers have their reinsurance programmes approved as part of the application process. The Insurance Act 1978 requires Class 4 companies to provide, with their annual statutory filing, a schedule of ceded reinsurance as detailed in section 14A of the Insurance Returns and Solvency Regulations 1980.

At present, only Class 4 licensed companies are required to notify the regulatory authority of their reinsurance programmes, as mentioned above. For all other classes of licence, it is the responsibility of the principal representative or insurance manager to ensure that reinsurance programmes are adequate.

In several other jurisdictions such changes, irrespective of the class of licence, are not only notified to the regulatory body but approval is required prior to their taking effect.

We therefore recommend that changes to the reinsurance programme for Class 1 to 3 licences are also notified to and approved by the regulatory authority.

5.4.6  Segregation of business

Jurisdictions world-wide have moved to require new applicants to set-up separate companies for life and general business. IAIS has recommended that the two types of insurance business should be written in separate companies as the nature of the risks is very different. Currently there are composite insurance companies operating from Bermuda.

The regulatory authority should review the procedures currently in operation before licensing new composite companies.

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We welcome your comments on this site. Prepared 27 October 2000