Consultation Paper - Proposed Instructions and Guidance on the Application of the Prudent Person Principle (2024-12-04)

Summary

This is a Bermuda Monetary Authority consultation paper proposing new Instructions and Guidance on how commercial insurers and insurance groups should apply the Prudent Person Principle (PPP) to their investment activities. It responds to the BMA's increased supervisory concern over insurers' growing allocations to illiquid, complex, non-publicly traded and related-party assets, and sets out detailed expectations across investment strategy, risk management, governance, outsourcing and derivatives use.

• Scope: Applies to all commercial insurers registered under Section 4 of the Insurance Act 1978 (Classes 3A, 3B, 4, C, D and E) and to Bermuda insurance groups (including reinsurers and group entities for which BMA is group supervisor).
• Investment strategy and risk management: Insurers should maintain an investment strategy with capital preservation and liquidity objectives, exposure limits, stress testing, and asset selection processes tailored to their liabilities, and should only invest in assets whose risks they can identify, measure, monitor and control.
• Governance: Boards must own investment strategy and risk appetite, ensure adequate skills/oversight, manage conflicts of interest (especially related-party asset management), and ensure senior management compensation aligns with long-term liability nature.
• Outsourcing: Where investment management is outsourced (including to affiliates), the board must retain oversight and accountability equivalent to in-house management, with contractual terms ensuring compliance with the Insurance Act 1978.
• Complex and related-party assets: Special care, valuation approaches and enhanced disclosure are expected for complex, illiquid, non-publicly traded, structured and affiliated/related party investments.
• CISSA/GSSA and derivatives: Insurers should self-assess appropriateness of standard capital charges for certain investments within their solvency self-assessments, and derivatives must be used only for risk or portfolio management (not speculation), with attention to counterparty, collateral and liquidity risk.
• Consequential rule changes: The proposals will lead to amendments to the Insurance Code of Conduct and the Insurance (Group Supervision) Rules 2011, subject to separate consultation in 2025.

The BMA is inviting comments on the proposals, with a proposed effective date for the Instructions and Guidance of 1 July 2025 if finalised as drafted.

Key obligations

• Interested parties must submit comments on the consultation paper by 5 February 2025
• Once finalised, insurers would be required to maintain an investment strategy meeting minimum PPP features (capital preservation objectives, exposure limits, liquidity and ALM considerations, derivatives use plan)
• Once finalised, insurers would be required to establish an investment-specific governance framework overseen by the board, including conflict of interest policies for related-party asset management
• Once finalised, insurers outsourcing investment management would be required to retain board-level oversight and ensure outsourcing agreements comply with the Insurance Act 1978
• Once finalised, insurers would be required to self-assess the appropriateness of standard capital charges for certain investments and integrate this into their CISSA/GSSA filings
• Once finalised, insurers would be required to ensure derivatives are used only for risk or portfolio management purposes, not speculation

Applies to

commercial insurers registered under Section 4 of the Insurance Act 1978 (Classes 3A, 3B, 4, C, D, E), reinsurers, Bermuda insurance groups

Deadlines

• 5 February 2025: Deadline for comments on the consultation paper
• 1 July 2025: Proposed effective date for the Instructions and Guidance on the Prudent Person Principle
• 2025 (unspecified): Separate consultation to occur on consequential amendments to the Insurance Code of Conduct and Insurance (Group Supervision) Rules 2011

Related documents

• This document amends Insurance (Group Supervision) Rules 2011