Response to Industry - Enhancements to the Regulatory and Supervisory Regime for Commercial Insurers (2012-06-01)

Summary

This is the Bermuda Monetary Authority's formal response to industry comments received on its January 2012 consultation paper proposing enhancements to the regulatory and supervisory regime for commercial insurers. It confirms which proposals will be adopted as originally proposed, which will be modified, and which timelines will be extended, ahead of draft legislation to implement the changes.

• Internal audit function: Commercial insurers must segregate and independently staff the internal audit function from compliance, business lines, underwriting and finance; compliance deadline extended by one year to 1 January 2014.
• Non-traditional activities: Certain activities (property management, investment business, fund administration, deposit-taking, investment banking, non-ancillary commercial/industrial activities) must be conducted in a separately incorporated and capitalised subsidiary or affiliate; activities running as of 31 December 2011 are grandfathered until 1 January 2017.
• Separate incorporation of dual-licence business: Insurers directly writing both long-term and general business must incorporate separately, subject to grandfathering of existing dual licences; Long-Term insurers may write accident and disability contracts of any duration.
• Licensing submissions: New commercial insurer applicants must submit five years of pro forma balance sheets and income statements demonstrating ECR compliance, plus high-level corporate governance and risk management information including planned outsourcing arrangements.
• Material change notifications: The scope of changes requiring 14-day prior notification under Section 30JB is expanded to cover outsourcing of key functions (internal audit, risk management, compliance, actuarial), acquisitions of controlling interests in material financial business entities, material new lines of business including portfolio transfers of all or substantially all of a line of business, and material divestitures (the last later confirmed as superfluous). Insurance groups regulated by a competent authority instead give post hoc notification within 90 days; no BMA objection or information request within 14 days is deemed non-objection.
• MSM floor and capital shortfalls: A Minimum Margin of Solvency floor of 25 percent of the ECR at the legal entity level applies. Insurers must report immediately upon becoming aware of non-compliance with the MSM or ECR and file a capital restoration plan within 14 days (extendable for good cause). Insurers and groups must disclose compliance with the MSM and ECR, and any material breach, in the notes to annual financial statements.

The letter notes that draft legislation to give effect to these changes would follow in the near future, and that a further separate consultation would address broader boundary issues between general business and long-term insurance.

Key obligations

• Commercial insurers must segregate and independently staff the internal audit function, with compliance required by 1 January 2014.
• Insurers conducting specified non-traditional activities (property management, investment business, fund administration, deposit-taking, investment banking, non-ancillary commercial activities) must conduct them through a separately incorporated and capitalised subsidiary or affiliate, with grandfathered activities required to comply by 1 January 2017.
• Insurers directly writing both long-term and general business must be separately incorporated, subject to grandfathering of existing dual licences.
• Licence applicants must submit five years of pro forma financial statements demonstrating ECR compliance and high-level corporate governance and risk management (including outsourcing) information.
• Commercial insurers must give 14 days' prior notice of expanded categories of material changes under Section 30JA/30JB, or, for insurance groups regulated by a competent authority, post hoc notice within 90 days.
• Insurers must report immediately to the Authority upon becoming aware of non-compliance with the MSM or ECR.
• Insurers in breach of the MSM or ECR must file a capital restoration plan within 14 days of the breach.
• Insurers and insurance groups must disclose in their annual financial statement notes their compliance with the MSM and ECR and any material breach of either requirement.

Applies to

Class 4 general business insurers, Class 3B general business insurers, Class 3A general business insurers, Class E Long-Term insurers, Class D Long-Term insurers, Class C Long-Term insurers, commercial insurers, insurance groups

Deadlines

• January 1, 2014: Extended deadline for commercial insurers to implement a segregated and independently staffed internal audit function.
• January 1, 2017: Grandfathering period ends for non-traditional business activities conducted as of 31 December 2011; must thereafter be conducted through a separately incorporated and capitalised subsidiary or affiliate.
• 14 days: Prior notification period required before making a reportable material change under Section 30JB (or before the Authority's objection window under Section 30JC lapses).
• 90 days: Post hoc notification period for insurance groups regulated by a competent authority to report a material change, instead of prior notification.
• 14 days: Period within which a commercial insurer must file a capital restoration plan after becoming aware of non-compliance with the MSM or ECR (extendable for good cause).