Insurance Guidance Note #14: Insurance Activity (March 2005)

Summary

This is Bermuda Monetary Authority Guidance Note #14 (March 2005), setting out the Authority's expectations for how registered insurers should manage their core insurance activities, including underwriting and reinsurance. It applies to all insurers registered under the Insurance Act 1978 and related regulations, and emphasizes that the insurer's board bears primary responsibility for sound and prudent management of these activities.

• Underwriting policy: Insurers should maintain board approved underwriting guidelines, evaluate and price risks appropriately, set premiums on reasonable assumptions, and control expenses related to premiums and claims.
• Derivatives: Insurers involved in derivative activities connected to insurance business, including embedded options in life products, must ensure these are properly identified and priced.
• Reinsurance management: Insurers should have a board approved strategy for selecting, monitoring, reviewing and controlling reinsurance and alternative risk transfer arrangements, sized appropriately to the insurer's business, capital and risk profile.
• Authority review: Insurers must make their reinsurance arrangements available for review by the Authority if requested.
• Proportionality: The degree to which specific elements of the guidance apply depends on the size, nature, complexity and risk profile of each insurer, including reduced expectations for captives insuring only their owners' risks.

The note also addresses transitional compliance: insurers must immediately comply with matters arising from the Insurance Amendment Act 2004, while for other guidance matters they are encouraged to come into compliance as soon as possible and no later than 31 December 2005, unless a later date is agreed with the Authority.

Key obligations

• Boards of registered insurers must approve and regularly review strategic underwriting policies (underwriting guidelines).
• Insurers must evaluate underwritten risks and establish and maintain adequate premium levels based on reasonable assumptions.
• Insurers must have systems to control and monitor expenses related to premiums and claims, including claims handling and administration.
• Insurers must ensure all derivatives underwritten in connection with insurance activities, including embedded options in life insurance products, are properly identified and priced.
• Insurers must establish a board approved reinsurance strategy addressing risk retention limits, reinsurance cover, and use of other risk transfer arrangements, appropriate to their size, business mix and complexity.
• The reinsurance program must address how reinsurance is purchased, how reinsurers are selected and their security assessed, and what collateral is required.
• Insurers must make their reinsurance arrangements available to the Authority for review upon request.
• Insurers must come into immediate compliance with matters arising from the Insurance Amendment Act 2004.
• Insurers should come into compliance with other guidance matters as soon as possible and by 31 December 2005 at the latest, unless a later date is agreed with the Authority.

Applies to

insurers registered under the Insurance Act

Deadlines

• 31st December 2005: Deadline for insurers to come into compliance with matters in this guidance note not related to the Insurance Amendment Act 2004, unless a later date is agreed with the Authority.
• immediate: Insurers must take immediate steps to comply with changes arising from the Insurance Amendment Act 2004 referenced in this guidance.