Update on changes to the Insurance Code of Conduct

The Bermuda Monetary Authority (BMA) has published its revised Insurance Code of Conduct (Code). The revised Code came into effect on 31 August 2022. Its publication concludes a public consultation period that commenced in October 2021.

The revisions implement changes that keep the Code aligned with international prudential standards in key areas such as corporate governance, outsourcing, business continuity, and disaster recovery and risk management. These proposals were the subject of the BMA’s Consultation Paper: Revisions to the Insurance Code of Conduct, published in January 2022 (January Consultation).

The revisions also introduce a conduct of business element. This had been the subject of earlier consultation. Details of the implementation of the conduct of business element had been foreshadowed in a stakeholder letter published in December 2021.

A redline of the Code, identifying all revisions, is attached to a stakeholder letter that was published by the BMA on 26 August 2022 (August 2022 Stakeholder Letter) which responds to industry feedback on the January Consultation.

Board members and senior management of Bermuda insurers will want to review the revised Code carefully.

The responses in the August 2022 Stakeholder Letter is very helpful in clarifying the BMA’s approach to some of the revised governance and outsourcing components, which were a particular focus for industry. The balance of this article reports on some of the more material responses. It assumes some familiarity with the January Consultation and the Code.

1. Governance

Independent non-executive directors (INEDs) and non-executive directors (NEDs) – eligibility requirements

An INED is a director who is free from any business or other association that materially interferes with the exercise of their independent judgement in the best interests of the insurer and its policyholders.

The Stakeholder Letter provides the following helpful clarification regarding when past associations will cease to constitute a material interference with independence:

  • A past beneficial ownership status which is no longer continuing will not ordinarily constitute a material interference with independence.
  • Employment in an executive capacity or status as a principal of a material consultant or adviser to the insurer will remain a material interference until expiry of a period of three years after termination of the employment or consultancy or advisory role.
  • Ordinarily, status as a principal of a consultant or adviser to the insurer will not materially interfere with independence if the consultancy or advisory role cannot be considered of material significance.

A NED is a director who is not a member of the insurer’s management. NEDs may include board members or chief and senior executives of the parent company of the insurer or of the parent company’s subsidiaries, but not executives of the insurer or its subsidiaries.

The Stakeholder Letter clarifies that:

  • A board member or the chief or a senior executive of the insurer’s parent company may sit as a NED of the insurer; and
  • Executives of the insurer or subsidiaries of the insurer are ineligible to sit as NEDs of the insurer.

Group governance

The Stakeholder Letter provides helpful clarification about how and the extent to which an insurer’s parent’s or group governance structure can be adopted for compliance at the insurer level. The answer turns on a distinction between two categories of insurer:

a) An insurer that is a subsidiary of:

  1. Another Bermuda regulated entity and/or Bermuda registered insurance group; or
  2. An entity (not being an entity in (a)(i)) that is subject to prudential regulation outside Bermuda; and

b) All other insurers.

If the insurer falls into category (a), it must have a majority of NEDs on its board (as must any insurer) but need not necessarily have INEDs. Furthermore, should there be INED positions on the insurer’s board, these may be filled by INEDs of the parent or of any other subsidiary company of the parent (other than a company that is a subsidiary company of the insurer).

If the insurer is in category (b), it must have INEDs on its Board. But INEDs of the parent or of any other subsidiary company of the parent (other than a company that is a subsidiary company of the insurer) may sit as INEDs of the insurer.

An insurer that is a member of a regulated insurance group may, if it considers it appropriate having regard to its business and individual profile, approve the use of group policies and functions at the insurer level.

Corporate governance - board effectiveness review

Insurers must adopt policies providing for a board effectiveness review. A board effectiveness review must:

  • Occur at least once every three years and on a material change in business activities or risk profile; and
  • Assess how effectively board members work together to achieve the board’s objectives. Evaluation should take place of individual board members as well as of the board itself.

An insurer must also adopt a board renewal policy, detailing how the board intends to renew itself to ensure it remains open to new ideas and independent thinking while retaining adequate expertise. The insurer must consider whether its directors have served for a period that could or could reasonably be perceived to materially interfere with their ability to act in the insurer’s best interests. There must be a process for appointing and removing directors, including the factors that will determine when a director will be reappointed.

2. Outsourcing

The new requirements in the Code relating to outsourcing apply on a prospective basis but an insurer must have contingency plans should an existing service provider be unable to provide the outsourced activity on terms that fit the outsourcing requirements of the new risk management framework.

3. Transition

As noted above, the final revised Code came into effect on 31 August 2022. However the BMA confirmed that it will ensure that insurers have adequate time from issuance for transition.

The transition period for Sections 1 to 7 of the Code (encompassing sections on governance, risk management framework, internal controls and outsourcing) will be 12 months from the date of issuance. The transition period for Section 8 of the Code (conduct-based provisions) will be 6 months from the date of issuance. Since Section 8 was consulted on some time ago, a shorter transition period was considered to be in order.

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