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The Bermuda Monetary Authority (BMA) has published a consultation paper entitled Proposed Enhancements to the Insurance Group Supervision Framework (CP).
The CP consults on seven proposed enhancements to the provisions of the Insurance Act 1978 (the Act) and other acts aimed at strengthening the supervision framework applicable to insurance groups. In summary, the proposed enhancements are:
- that group supervision by the BMA be mandatory where the insurance group’s ultimate parent company is in Bermuda. At the moment, group supervision is a discretionary matter for the BMA, with the presence of the ultimate parent company in Bermuda merely a material consideration when making a determination about group supervision.
- a direct approach would apply to group supervision instead of the indirect approach currently exercised via the “designated insurer”.
- a minimum set of direct powers applicable directly to the insurance holding company to facilitate a more effective and robust supervisory and enforcement mechanism for Bermuda insurance groups.
The enhancements seek to rectify a potential shortcoming in the existing approach to group supervision. At present, group supervision by the BMA is predominantly effected by indirect supervision via the imposition of supervisory requirements on a designated insurer (a commercial insurer in the group which is already supervised by the BMA). The BMA leverages its power over the local regulated company to indirectly influence the head of the group. The head of the group is the company that can affect the insurer’s ability to comply with regulatory requirements, can decide overall group strategy, has the group’s capital and debt-raising ability, and has the power make investments that expand the group’s overall risk profile in ways that may affect insurers in the group. However, the owners of Bermuda based groups are typically not regulated entities. The BMA has no direct power over the head of the group, where it is an unregulated entity, and the designated insurer may have no power to compel the insurance it to take action. By direct supervision of the head of the group, whether or not it is a regulated entity, the BMA will, if it needs to, be able to direct that highest level parent entity.
The proposed changes would also align group supervision with the direct approach which is already used in the case of internationally active insurance groups (IAIGs). In any event, the need to ensure an effective regulatory framework to support group supervision has been a topic of much discussion internationally in recent years, and thus enhancements of some description are in line with prevailing international standards.
The CP notes that rules are forthcoming in which the BMA will embed ComFrame provisions relating to IAIGs into Bermuda’s insurance regime. These are to be developed in tandem with the enhancements consulted on in the CP.
The proposals are summarised below.
Mandatory group supervision
Mandatory group supervision by the BMA will apply in all cases where an insurance group is headed by a Bermuda commercial insurer or a parent entity incorporated formed or registered in Bermuda that is not a subsidiary of another entity (an ultimate parent entity or UPE).
The existing discretionary group supervision (amended so as to carve out any triggers of mandatory group supervision) will apply only where the UPE is not in Bermuda. Where this is the case, the BMA will continue to have discretion whether to become group wide supervisor based on the matters (amended as above) in 27B(3) of the Act.
Designation and registration of insurance holding company
When the BMA is the group supervisor, it will designate a relevant entity which it considers appropriate as the designated “insurance holding company” by written notice. The “insurance holding company” must be:
“an entity that is a body corporate incorporated, formed or registered in Bermuda (including by way of continuation) that holds participations in one or more companies where at least one of the companies is an insurer”
As foreshadowed above, the insurance holding company can be an unregulated company.
In making a determination as to which entity to designate as the designated insurance holding company, the BMA will adopt the approach currently used when identifying the Head of an IAIG (see Section 27I(2) of the Act) namely, the BMA will have regard to the entity that exercises control over:
- insurers in the group; and
- other group members which may pose a risk to the group’s insurance business.
Any of the following can be designated as the insurance holding company for an insurance group:
- the Bermuda UPE;
- a specified insurer of the insurance group;
- the Head of an IAIG; or
- an intermediate holding company incorporated in Bermuda.
Minimum set of direct powers
Sections of the Act that are currently enforced via the designated insurer will be amended to enable direct application over the designated insurance holding company. The result, for instance, will be that, where it appears to the BMA that a designated insurance holding company is in breach of any provision of the Act or regulations or rules applicable to it, the BMA may give directions applicable to the designated insurance holding company, such as a prohibition on dividends declared or paid by the designated insurance holding company, or on the entry into specified transactions, or on the making of investments of a specified class, or to require the removal of a controller or officer of the designated insurance holding company. In addition, the BMA proposes to introduce the following minimum direct powers:
- to apply for injunctions restraining acts by a designated insurance holding company;
- to issue penalties against a designated insurance holding company;
- to designate another insurance holding company or insurers within the group as the designated insurance holding company;
- to object to appointment or removal of officers and controllers of the designated insurance holding company;
- to require a designated insurance holding company, in case of contraventions, to submit a remediation plan,
- to petition the winding up of designated insurance holding company.
The powers would be exercised proportionately, relative to the nature, scale and complexity of the insurance group. Where relevant, the BMA will engage other involved supervisors of the insurance group before decision-making.
Shareholder controller changes and material changes
Shareholder controller changes affecting a designated insurance holding company will be subject to the supervisory processes that currently apply to designated insurers.
Should the enhancements be introduced, two types of material change, where made in respect of a designated insurance holding company, will require will require a prior BMA no-objection, whereas currently they only require a notification by a designated insurer. The two types of material change are:
- an amalgamation with or acquisition of another firm; or
- an acquisition of controlling interests in an undertaking that is engaged in non-insurance business which offers services and products to persons who are not affiliates of the insurer
Most of the remaining types of material change within an insurance group, which currently require a notification from a designated insurer, will remain subject to the same notification procedure (with the amendment that the designated insurance holding company makes the notification).
Commencement
The bill would come into force by notice, to be effective at the time all consequential amendments to the prudential rules are made operable. A one-year transition period will be afforded to allow affected groups and the BMA to prepare for implementing the enchantments.
The feedback period closes on 15 January 2025.
Insurance and reinsurance
Bermuda