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* Planning For The Future | Offshore in BermudaIn January, the Bermuda Monetary Authority (BMA) published its 2008 Business Plan, setting out key regulatory initiatives and business goals for the organisation. The publication was a first for the Authority, demonstrating the Authority’s commitment to transparently explaining its future work programme to its stakeholders.
The BMA is already highly compliant with international standards, with a strong operational capability. The Business Plan outlines our pledge to build on this solid base by developing our regulatory framework and expanding our professional staff.
Key regulatory initiatives in the plan include introducing new risk-based capital standards for insurance companies; strengthening anti-money laundering supervision; implementing Basel 2 standards for banks and investment firms; and starting work to develop standards for insurance groups.
These are the very regulatory issues that are challenging authorities in other leading jurisdictions, whether in London, New York or elsewhere. Bermuda, which is involved in setting international standards, is these days regulated to effectively the same high level of standards as any major international insurance centre.
Insurance solvency, models and group supervision
The Authority currently operates risk-based supervisory models for its insurance and banking, trust and investment departments. These models allow the Authority to analyse the impact and probability of failures among regulated firms, in order to more intensively focus our supervisory resources.
The Insurance Act 1978, as amended, requires insurers and reinsurers to meet a margin of solvency, as well as minimum amounts of paid-up capital for registration. The Insurance Returns and Solvency Regulations 1980 define and set the minimum solvency margin (MSM).
The MSM is calibrated based upon the scale of an insurer’s business, with higher premium and/or reserving levels requiring more statutory capital and surplus. No account is taken by the MSM of the fact that certain lines or classes of business are inherently riskier than others.
The Authority believes, however, that capital adequacy should properly reflect an insurer’s risk profile, including the nature and complexity of the business it writes. A solvency regime that takes into account the inherent risk of different respective lines ought to afford increased protection for policyholders.
We are accordingly introducing a risk-based capital model (the Bermuda Solvency Capital Requirement, or BSCR) as a tool to assist both in measuring risk and in determining appropriate levels of capitalisation.
The BSCR is being implemented in phases, first among the Class 4 insurers, and subsequently among commercial Class 3 insurers. The Authority has already required Class 4 insurers to run the BSCR for their 2007 year-end and submit the results for review. We will propose to Government that formal legislation be adopted later this year to apply these reporting standards to Class 4 insurers, to come into force for the year-end 2008 filings. The BSCR approach will be extended to a subset of Class 3 insurers, which are subject to an ongoing re-categorisation exercise, for year-end 2009 filings.
The BSCR is calibrated at 99% Tail Value-at-Risk (TVAR), with a one-year time horizon. The model assigns capital charges for credit risk, fixed income securities risk, equity risk, interest rate and liquidity risk (including asset/liability mismatch), premium risk, reserving risk and catastrophe risk.
The new model will enhance our existing capital adequacy regime by taking into account the different risk profiles of Bermuda’s insurance companies. We are also announcing plans to allow the use of internal economic models and to move towards group supervision of large insurance firms.
The Authority also plans to assess an operational risk charge, and there will be provision to allow certain regulatory discretion around the application of the model formulae. We intend to consult further with insurers on the details of these proposals in the second quarter of 2008, prior to implementing the new arrangements formally for the year-end 2008 filing.
Our risk-based philosophy ensures that our standards are appropriately calibrated to Bermuda’s wholesale financial markets and that our supervisory resources are applied to those firms that pose the greatest risk.
Our approach accepts that, from time to time, some financial firms will fail. Any other starting point imposes excessive costs on industry. Our approach is to focus our efforts most on high-impact firms and accept a higher risk of failure for lower-impact ones. Bermuda’s reputation is enhanced by a regulatory regime that is focused and that manages failures effectively, not one that seeks to avoid failures entirely.
Operational capability
The Business Plan explains that the Authority’s supervisory staff has grown in recent years and that the organisation has recently restructured its supervisory teams, added an actuarial team, created a risk and policy team and set up a run-off team. Further staffing increases are planned.
In support of our goals, we have made a series of senior management promotions, led by the appointment of Jeremy Cox to the newly-created position of Deputy Chief Executive Officer.
This appointment means that Jeremy, who was formerly the BMA’s Supervisor of Insurance, has been given responsibility for all supervisory activities conducted by the Authority. The supervision of banks, trust companies and investment businesses now come under his responsibility, in addition to insurance supervision.
As my deputy, Jeremy will also assist in the ongoing strategic development and direction of the Authority. He will also formally deputise for me in my absence, in various capacities related to the executive management of the Authority, as well as via participation in key external initiatives or meetings with government and industry stakeholders here and overseas.
The new Deputy Chief Executive Officer position brings together key responsibilities at the top of the organisation within our strategic management framework. The Chairman and Board also view this as a key development in our succession planning process, which aims to ensure that we nurture and maximise the talent and skills within the Authority to cover the organisation’s needs from a management and operational perspective now and for the future.
Matthew Elderfield is chef executive officer of the Bermuda Monetary Authority.