Insurance Guidance Note #15 - Investments (March 2005)

Summary

This is Guidance Note #15 issued by the Bermuda Monetary Authority's Insurance Department, setting out expectations for how registered insurers should manage investment activities under the Insurance Act 1978 and related regulations. It emphasises a prudent person approach and places ultimate responsibility for sound investment management on the board of directors, with the degree of formality expected to scale with an insurer's size, nature, complexity and risk profile.

• Investment strategy: Boards should adopt an overall strategic investment policy, reviewed at least annually, covering risk profile, strategic asset allocation, asset limits, restricted or disallowed investments, pledging/lending conditions, derivatives policy, accountability, and contingency planning for deteriorating markets.
• Monitoring and control: Insurers should maintain risk management systems covering market, credit, currency, liquidity and custodial risks, plus internal controls to safeguard assets and ensure compliance with legal, accounting and regulatory requirements.
• Asset/liability matching: Insurers should have procedures to monitor and manage asset/liability positions so investments and assets can meet liabilities as they fall due.
• Derivatives: Insurers using derivatives need a board-approved policy addressing permitted purposes, exposure limits, restricted derivative types, responsibilities of directors and staff, and internal controls including segregation of duties, model vetting and independent pricing verification.
• Solvency and liquidity: Insurers must maintain assets sufficient to meet the applicable minimum margin of solvency and, for general business insurers, the minimum liquidity ratio, and must certify asset values on solvency certificates at year end.

The guidance applies to all insurers registered under the Bermuda Insurance Act. Insurers were expected to comply with changes stemming from the Insurance Amendment Act 2004 immediately, and to come into compliance with other aspects of this guidance as soon as possible and no later than 31 December 2005, unless a later date was agreed with the Authority.

Key obligations

• Boards must establish and adhere to investment policies, standards and procedures consistent with a prudent person standard to avoid undue risk of loss.
• Boards must approve and review the overall strategic investment policy at least annually, covering risk profile, asset allocation limits, restricted investments, pledging/lending conditions, derivatives use, accountability and contingency plans.
• Insurers must maintain systems of internal control to safeguard assets, supervise investment activities, and ensure compliance with legal, accounting and regulatory requirements.
• Insurers must maintain effective asset/liability matching procedures to ensure liabilities can be settled when due.
• Insurers using derivatives must have a board-approved, regularly reviewed derivatives policy addressing permitted uses, exposure limits, restricted instruments, responsibilities, and risk management/internal control systems with segregation of duties.
• Insurers must maintain assets sufficient to meet the applicable minimum margin of solvency for general and/or long-term business at all times.
• General business insurers must maintain assets sufficient to meet the minimum liquidity ratio for general business at all times.
• On the general business solvency certificate, the two signing directors must state whether asset values at year end were at least equal to the statutory balance sheet asset value.
• On the long-term business solvency certificate, the two signing directors must state whether asset values at year end were at least equal to the statutory balance sheet asset value.
• Insurers must take immediate steps to comply with investment-related changes introduced by the Insurance Amendment Act 2004, and come into compliance with other guidance provisions by 31 December 2005 or a later date agreed with the Authority.

Applies to

insurers registered under the Insurance Act, general business insurers, long-term business insurers

Deadlines

• 31st December 2005: Deadline (or later date agreed with the Authority) by which insurers should come into compliance with matters covered by this guidance note, other than changes required by the Insurance Amendment Act 2004.
• immediate: Insurers must take immediate steps to comply with investment-related changes introduced by the Insurance Amendment Act 2004.
• annually: The board of directors should review the adequacy of the overall investment policy at least annually.