GROUP SUPERVISION In this first publication we will: l Revisit Bermuda’s insurance group supervision regime l Provide an overview of the regime; how it has evolved in the six years since coming into force and discuss some of the challenges faced by group supervisors l Provide some perspectives on what the future of Bermuda group supervision will look like “Group supervision is not just another layer of regulatory oversight; rather, it complements the supervision of solo entities” ISSUE 1 • JUNE 2018 BMA Insurance Digest
Transcript
INSURANCE GROUP SUPERVISION 1
GROUP SUPERVISION
In this first publication we will:
l Revisit Bermuda’s insurance group supervision regime
l Provide an overview of the regime; how it has evolved in the six yearssince coming into force and discuss some of the challenges faced bygroup supervisors
l Provide some perspectives on what the future of Bermuda groupsupervision will look like
“Group supervision is not just another layer of regulatoryoversight; rather, it complements the supervision of solo entities”
ISSUE 1 • JUNE 2018
BMAInsurance Digest
INSURANCE GROUP SUPERVISION2
Bermuda’s group supervision framework reflects inter -national developments and principles adopted by theInternational Association of Insurance Supervisors (IAIS).
The fundamental objectives have not changed:
l Policyholder protection
l Promoting financial stability
l Ensuring at least one supervisor has an overall view ofthe group and its associated risks
l Addressing any supervisory gaps, the risk of contagionand the impact of any unregulated entities
Key areas of focus within the group supervision frameworkare:
l Ensuring solvency at group level
l Monitoring intra-group transactions, including unregulatedentities in the group that could compromise the solvencyof the group
l Assessing key control functions such as corporategovern ance, risk management, actuarial and internalcontrol processes of insurance groups
Bermuda groups have been increasing market share inother jurisdictions and/or their corporate structures andbusiness models are becoming increasingly complex andinterconnected. As such, the Authority’s group supervisionhas also evolved, underpinned by appropriate legislativepowers and regulations. Group supervision is no longerperceived as an added layer of regulatory oversight, but isappreciated as being complementary to solo entity supervision.
With Bermuda attaining Solvency II Equivalency, theAuthority’s group supervision practices are not only similarto the standards of other leading jurisdictions, but theAuthority also distinguishes itself as a leader with respect tosome aspects of group supervision such as ‘Crisis Prepared-ness’1 and development of ‘Supervisory Outlook Ratings.’2
For Crisis Preparedness, the Authority leads an annualtest (i.e. crisis simulation) of the Bermuda group’s crisismanagement plan as part of the supervisory college meetings.
The Authority believes that supervision should be forwardlooking, not just a “rear view mirror” compliance exercise.The Supervisory Outlook Ratings assessment is derivedfrom (among other things,) information arising frommajor events, analysis of the Capital & Solvency Return,results of on-site assessments, and analytical tools simulatingvarious scenarios of a group’s solvency position. With thisinformation, the Authority assesses both the adequacy ofthe group’s risk management and governance and its abilityto withstand severe shocks and still meet regulatory capitalrequirements.
BMA’S GROUPSUPERVISION REGIME
HOW HAS BERMUDA GROUPSUPERVISION EVOLVED?
OBJECTIVES
1 A crisis or emergency situation is defined as any situation or event, regardless of its origin, that happens unexpectedly, and could materially affect or impairthe financial condition of an insurance entity in at least one country or jurisdiction with a potential cross-border impact on one or more entities of the groupin other countries and that, accordingly demands immediate actions. 2 A supervisory outlook is a forward-looking assessment of an insurer’s governance and risk management practices and the ability to withstand catastrophicshocks and still meet the regulatory capital requirement.
INSURANCE GROUP SUPERVISION 3
l The Authority is committed to being a leading groupsupervisor for appropriate entities
l Coordination and information exchange between inter-national regulatory bodies is critical in ensuring success ofgroup supervision
l Key activities for coordination includes, among others,regulatory matters, licensing and bi-lateral and multi-lateraldiscussions on key issues
l Insurance Act 1978
l Insurance (Group Supervision) Rules 2011
l Insurance (Prudential Standards) & (Insurance GroupSolvency Requirements) Rules 2011
ROLE AS GROUP SUPERVISOR LEGISLATION SUPPORTINGBERMUDA’S GROUP SUPERVISION
Localsupervisor
Localsupervisor
Localsupervisor
Localsupervisor
Localsupervisor
Groupparent
Subsidiary 1 Subsidiary 2
Illustrative example of an insurance group structure which can take various forms
FUNCTIONS AND APPROACH
SOLVENCY
The Authority conducts its functions as group supervisorunder the Act, which include:
l Assessing insurance groups’ compliance with theAuthority’s solvency rules
l Ongoing supervisory review and assessment of a group’sfinancial position and governance systems
l Coordinating the gathering and dissemination ofrelevant or essential information from groups for goingconcern or emergency situations
l Convening and conducting supervisory colleges withother supervisory authorities that have regulatory oversightof entities within a group
l Coordinating any enforcement action that may be takenagainst insurance groups or their members
The Authority’s minimum solvency requirements, coupledwith the Authority’s application of the Bermuda SolvencyCapital Requirement (BSCR), continues to supportoverall stability of the insurance sector.
The Authority continues to monitor and evaluate the levelof robustness, sophistication and comparability ofBermuda’s capital requirements and continues to pro -actively ensure capital requirements are in line with bestpractices in terms of solvency regimes—this includes theability to apply capital add-ons.
INSURANCE GROUP SUPERVISION4
The Authority plays a significant role as a leader in theregulation of the global catastrophe market and since 2015has produced an annual report, Catastrophe Risk inBermuda,3 to demonstrate its commitment to high standardsof transparency.
The 2015 and 2016 reports highlighted the overallresilience of the Bermuda Insurance Industry to withstandpotential adverse impacts from various catastrophe andsevere, but possible underwriting losses.
3 A copy of the report is available in the Publications/BMA Surveys section of the Authority’s website (www.bma.bm)
DID YOU KNOW?
INSURANCE GROUP SUPERVISION 5
The fluctuation in the size of Bermuda’s insurance groupscan be attributed to the Merger & Acquisition (M&A)activities experienced by Bermuda’s (re)insurance industryfrom time to time.
As group supervisor, the Authority has developed adedicated risk-based supervisory approach to M&As whichincludes close engagement with various stakeholders preand post closing of the transaction.
The Authority takes into consideration the nature of theM&A (e.g. hostile takeover or regular M&A) in determiningits course of action and in all cases seeks to understand therisk and reward perspectives of the transaction.
The Authority holds discussion with regulators in jurisdictions
affected by the M&A and executive management of theimpacted companies (the acquirer, the target and in somecases their joint committees). In addition, the Authoritymakes a prospective assessment of the capital adequacy inview of the combined risks. The Authority also conductsfitness and propriety checks with respect to shareholdercontroller, controller, officers and director changes andreviews relevant information presented to the Board.
Once the transaction is closed, the supervisory approach isa continuing process aimed at understanding the oversight,governance and control environment for key integration risks.
The Authority achieves this through regular engagementwith the Board and executive management to obtainprogress updates especially on integration /execution risks.
SIZE OF BERMUDA INSURANCE GROUPS
In US$millions
# of Total Capital &Year Groups GPW NPW Assets Surplus
2016 24 $60,307 $45,671 $224,336 $76,861
2015 21 $42,079 $33,565 $155,307 $55,625
2014 22 $47,838 $38,787 $161,666 $56,591
2013 21 $45,014 $37,069 $151,590 $54,034
2012 22 $43,305 $35,168 $154,621 $54,695
2011 23 $40,219 $33,449 $143,977 $47,206
Source: Annual filing by Bermuda Insurance Groups
INSURANCE GROUP SUPERVISION6
APPLYING GROUP SUPERVISION
The Authority appoints a designated insurer within thegroup which is the lead and administrative point of contact,through which the group is required to fulfill its regulatoryreporting and compliance obligations.
One of the biggest challenges has been overcoming theconfidentiality rules related to the exchange/sharing ofinformation. As such, the Authority continues to establishMemoranda of Understanding (MoUs) with relevantjurisdictions in relation to group supervisory activities.
The other area of focus has been ensuring that we have atruly global view of our insurance groups’ activities. Asgroup supervisor we need to demonstrate an understandingof the respective group’s risk exposures, inherent risk,financial position soundness, capital adequacy, risk manage-ment and governance mechanisms.
This can only be achieved through effective communication,cooperation and coordination with other supervisors.
As the group supervisor we are responsible for facilitatingsuccessful supervisory colleges and ensuring that collegemembers are actively engaged.
The true test of our effectiveness as group supervisor willcome during a period of crisis. As group supervisor, wewould have to take steps to limit the risk of significantproblems; however, should a risk matter arise, we will facilitaterapid action alongside other supervisors and relevantauthorities.
The supervisory college is a forum for the collaborationand coordination of supervisory activity and the Authorityviews it as an ongoing process. This work may occur withinsupervisory college meetings or outside of the meetingsetting. It is important that communication is timely andsupervisors are both proactive and flexible.
Where the Authority is the group supervisor, it will hostsupervisory colleges on an annual basis. At minimumthe frequency of the interaction between the supervisorsfor any Bermuda group depends on a number of factors,including risk profile, size and complexity.
Supervisory colleges are designed to provide a platform for:
l Effective supervisory cooperation and coordinationbetween the Authority and other regulators in relation toBermuda groups
l Developing a shared understanding among relevantregulators about the risk profile of groups in order tominimise risk of contagion
l Reducing any supervisory gaps and avoiding unnecessarysupervisory duplication
During the college meetings, the Authority presents andreceives detailed analysis, as well as coordinated Supervisoryplans from relevant overseas regulators. Post-collegesfeedback obtained from other supervisory authoritiescontinue to demonstrate effective and efficient executionof colleges.
SUPERVISORY COLLEGES
l The BMA has participated in 123 supervisory collegessince 2012—75 of which were as group supervisor
l There are 45 regulators that participate in varioussupervisory colleges conducted by the BMA for itsBermuda insurance groups
DID YOU KNOW?
BIGGEST CHALLENGES?
INSURANCE GROUP SUPERVISION 7
FUTURE OF SUPERVISION
Emerging technologies (such as insurtech, artificialintelligence, big data, mobile technology and blockchains,among others) will have a significant impact on insurers’business models.
Regulation, together with group supervision, will need toevolve to ensure the right balance of policyholder protectionwithout stifling innovation.
As a forward-looking supervisor, the Authority formed anInsurance Innovation Committee in 2017.
l One of the achievements of this Committee is thedevelopment of the cyber supervision regime, includingenhancement to the Capital and Solvency Returndisclosures for cyber-related data
l Significant work of this Committee will continue through2018 with a particular focus on the introduction of theRegulatory Sandbox for insurtech
l Operationally, the Authority will embrace SupervisionTechnology (suptech) strategy through the utilisation ofartificial intelligence and machine learning, such as naturallanguage processing, to predict prospects of (re)insurers’solvency, create supervisory capacity and enhance risk-based supervision
l The BMA is a full member of the InternationalOrganisation of Securities Commissions (IOSCO), amember of the Group of International Finance CentreSupervisors (GIFCS), and the Group of InternationalInsurance Centre Supervisors (GIICS), and a foundingmember of the International Association of InsuranceSupervisors (IAIS)
l The Authority remains active internationally bymaintain ing positions on key committees within IAIS;highlights of International Participation were included inthe BMA annual report
l Bermuda has had qualified jurisdiction status with US’National Association of Insurance Commissioners (NAIC)since January 2015
INTERNATIONAL INTERACTION:DID YOU KNOW?
In the second issue of BMA Insurance Digest, the Authorityplans to cover the following topics:
l Cyber Risk
l Capital Fungibility
l Crisis Management including Crisis Simulation exercises
The above list is not exhaustive, but aims to highlight someof the current and emerging risks affecting Bermudaregistrants that are being considered.
WHAT’S NEXT?
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THE BERMUDA MONETARY AUTHORITY (BMA or theAuthority) will produce a series of publications providingviews about current and emerging issues and other regulatorydevelopments.
BMA Insurance Digest is published in electronic format onlyand can be downloaded as a PDF file on the Authority’swebsite www.bma.bm.
If you wish to receive an e-mail notice when the nextedition is available, you may sign up to our e-subscriptionservice by clicking the e-alerts button on the homepage ofthe Authority’s website.
