Consultation Paper on Enhancements to the Regulatory and Supervisory Regime for Commercial Insurers (January 2012)

Summary

This is a Bermuda Monetary Authority consultation paper (January 2012) seeking industry feedback on proposed enhancements to the regulatory and supervisory regime for commercial insurers, defined as Class 4, 3B and 3A general business insurers and Class E, D and C long-term insurers. The paper sets out nine specific proposals and invites comments before any rules are finalised.

• Internal audit segregation: Require commercial insurers to segregate and independently staff the internal audit function, separate from compliance, business lines, underwriting and finance.
• Non-insurance activities: Require certain non-traditional activities (property management, investment business, fund administration, deposit-taking, investment banking, etc.) to be conducted in a separately incorporated and capitalised subsidiary or affiliate, with a five-year transition for existing activities.
• Dual licenses: Require separate incorporation of insurers directly writing both long-term and general business; no new dual licenses approved on or after 1 July 2012, though existing dual licenses could continue.
• Accident and disability term: Eliminate the five-year minimum term requirement for accident and disability insurance written by long-term insurers.
• Licensing applications: Require additional information in licence applications, including five-year pro forma ECR compliance projections and corporate governance/risk management details.
• Prior notification of business changes: Expand the material changes requiring 14-day advance notice and subject to the Authority's power to object, to cover outsourcing of key functions, acquisitions of material financial businesses, material new lines of business/portfolio transfers, and material divestitures.
• MSM floor: Set a floor for the legal entity minimum margin of solvency (MSM) equal to 25 percent of the enhanced capital requirement (ECR).
• Non-compliance reporting: Require immediate reporting of any MSM or ECR non-compliance and filing of a corrective plan within 14 days, replacing the current 30-day/14-day reporting windows.
• Public disclosure: Require commercial insurers and insurance groups to publicly disclose their MSM/ECR compliance and any material breach.

The Authority proposed that most changes take effect from 1 January 2013, except the separate incorporation requirement for direct long-term/general business writers, proposed for 1 July 2012. Interested parties were invited to submit comments to policy@bma.bm no later than 15 March 2012.

Key obligations

• Submit written comments on the proposals to policy@bma.bm no later than 15 March 2012.
• If adopted, commercial insurers would need to segregate and independently staff the internal audit function from compliance, underwriting and finance.
• If adopted, commercial insurers conducting non-traditional (non-insurance) activities would need to move these into a separately incorporated and capitalised subsidiary or affiliate, with existing activities permitted to continue for up to five years.
• If adopted, insurers directly writing both long-term and general business would need to separately incorporate these operations, with no new dual licenses approved from 1 July 2012.
• If adopted, licence applicants would need to submit five-year ECR pro forma projections and governance/risk management information with applications filed on or after 1 January 2013.
• If adopted, commercial insurers and groups would need to give the Authority 14 days' prior notice of, and be subject to objection on, prospective outsourcing of key functions, acquisitions of material financial businesses, material new lines of business/portfolio transfers, and material divestitures.
• If adopted, commercial insurers would need to report any MSM or ECR non-compliance to the Authority immediately and file a corrective plan within 14 days.
• If adopted, commercial insurers and insurance groups would need to publicly disclose their MSM and ECR compliance status and any material breach.

Applies to

commercial insurers (Class 4, 3B, 3A general business insurers), commercial insurers (Class E, D, C long-term insurers), insurance groups

Deadlines

• 15 March 2012: Deadline to submit comments on the consultation proposals to policy@bma.bm.
• 1 January 2013: Proposed effective date for most enhancements, including internal audit segregation, non-insurance activity separation, licensing requirements, MSM floor, non-compliance reporting and public disclosure requirements.
• 1 July 2012: Proposed effective date for the requirement to separately incorporate direct long-term and general business insurance operations; no new dual licenses would be approved on or after this date.
• 14 days: Proposed timeframe within which an insurer must file a corrective plan with the Authority after becoming aware of MSM or ECR non-compliance.
• five years: Transition period during which non-insurance activities conducted as of 31 December 2011 could continue under existing authorisation before requiring separate incorporation.