Transcript The Bermuda Market in 2005

June 2008
BERMUDA CAPTIVE CONFERENCE
Bermuda Captive Conference
The Fairmont Southampton
June 17th 2008
CURRENT ISSUES & REGULATORY
UPDATE
•
OPENING REMARKS
•
Moderator: Peter Willitts, President,
BIMA
•
Topics to be Covered
BERMUDA CAPTIVE CONFERENCE
Panellists:
• Shelby Weldon – Director Insurance,
Bermuda Monetary Authority
• Jason Carne – Partner, KPMG Bermuda
• David J. Doyle – Partner, Conyers Dill &
Pearman
Bermuda Monetary Authority
2008/09
Business Plan
SHELBY WELDON
CURRENT CHALLENGES:
• Leading International financial Center
• Evolution of International Regulatory
Standards
• Turbulent Capital Markets & Softening
Insurance Market
2008 BUSINESS PLAN HIGHLIGHTS:
• Class 3 Re-categorization
• Solvency Regulations
• On-Site Program
CLASS 3 RE-CATEGORIZATION
Shelby Weldon & David Doyle
RATIONALE FOR PROPOSAL:
• Risked Based Approach to Supervision
• Limited regulatory resources
• Captive vs. Commercial
• Appropriate fee structure
TIMELINE:
• Consultation Paper presented to Market – May
2008
• Consultative period – May 2008 to June 2008
• Legislation passed by House of Assembly –
July 2008
• Re-registration process – 3rd & 4th Quarters
2008
• All companies reregistered – 1st Quarter 2009
• NEW CATEGORIES
• NEW 3’S
• 3 A’S
• 3 B’S
• SPECIAL PURPOSE INSURERS
• The New Class 3
• Captives writing > 20% but < 50% unrelated net
premium
CLASS 3A
• Companies whose percentage of
unrelated business represents 50% or
more of net premiums written and/or
booked reserves
• Companies net written premiums does
not exceed $50 million
CLASS 3B
• Companies whose percentage of
unrelated business represents 50% or
more of net premiums written and/or
booked reserves
• Companies net written premiums exceed
$50 million
• SPECIAL PURPOSE INSURERS
(“SPI”)
• TYPICAL SECUITISATION SPECIAL PURPOSE
VEHICLE
• SINGLE FULLY FUNDED INSURANCE
CONTRACT/SPV ISSUES DEBT
• NOTE PAYMENTS SUBORDINATE TO
INSURANCE PAYMENTS
• SPI’S CAPITAL TO BE $1/LICENCE
RESTRICTED
• TIMING
• ASSUMING AMENDMENT ACT
APPROVED BY LEGISLATURE:
•
Current Class 3 companies that would satisfy the
criteria for Class 3A or Class 3B will be required
to make application to the BMA for
reclassification prior to December 31, 2008.
•
Any insurer failing to make the required
application will cease to be registered as an
insurer and the BMA will cancel its
registration.
Bermuda Solvency Capital Requirement
(“BSCR”)
Regulators view unexpected adverse deviations as “RISK”
Capital is the buffer to absorb the shocks of unexpected
adverse deviations.
Losses
Required capital
for unexpected
losses
Expected losses recorded
in loss reserves
Beginning of year
End of year
Capital adequacy should be a function of a company’s riskprofile
Required Capital
Assets
Liabilities
(Expected Losses
and Loss
Adjustment Expenses)
As the
Company’s risk
profile increases,
its capital
requirement
increases as well
Solvency and capital requirements are prescribed for
all insurers under the Insurance Act 1978.
 Under the existing solvency regime, insurers
with varying risk profiles may have the same
capital requirement.
 Present system is a simple formulaic model that
does not adequately reflect the complexities
surrounding an insurer’s operations.
Therefore, an insurer writing property catastrophe
lines of business would have the same level of
required capital as an insurer writing auto liability if
the two have the same premium volume and/or
reserves.
 The BMA, in collaboration with PWC, undertook
the task of designing a risk-based capital model
that suited the Bermuda insurance market.
 The Class 4 market supported the proposal by
providing information and feedback throughout
the process.
 The BSCR assigns additional required capital to
insurance companies with greater risk.
Presently, the BSCR will be applied to the Class
4 Insurance market.
MEASUREMENT OF REQUIRED
CAPITAL & SURPLUS
Calculate capital by estimating the unexpected
adverse variance in net assets over a 1 year time
horizon at a given risk measure.
Steps:
1) The unexpected adverse variance of major
balance sheet classes are estimated within a
specified confidence level and risk measure (e.g.
99% TVaR).
2) The individual variances are aggregated,
allowing for some diversification benefit and
correlation between credit risk and reserve risk,
to obtain the total capital requirement.
BSCR REPRESENTATION
2
2
1
 1

2
2
2
2
2
BSCR  C fi  Ceq  Cint  C prem   Ccred  Crsvs    Ccred   Ccat
2
 2

The BSCR identifies 7 risk areas (fixed income
investments, equity investments, interest rate/liquidity risk,
premium risk, reserve risk, credit risk and catastrophe
risk). Various capital charges are applied to these risk
areas to derive required capital.
The information needed to populate the BSCR model is
derived from the revised financial statements and
Schedules II-VI.
SCHEDULE V –
SCHEDULE OF RISK MANAGEMENT
•
Assists with qualitative assessment of the
insurer’s operations and risk position
•
Data for Interest Rate Risk, Catastrophe Risk,
Asset/Liability Duration and Gross and Net
PMLs, etc.
•
“Guidance” projections on operating
performance, and material future environmental
threats
•
Description of risk management process
•
Stress and scenario tests
BERMUDA ACCOUNTING
DEVELOPMENTS
Jason Carne
BERMUDA ACCOUNTING
ENVIRONMENT
•
•
Bermuda market typically uses 3 Primary
GAAP’s
–
US GAAP
–
IFRS
–
CANADIAN GAAP
Some captives elect to waive audit or GAAP
Financial Statements and prepare only audited
statutory Financial Statements for filing with the
BMA.
US GAAP DEVELOPMENTS
•
Companies may now elect to record all financial
instruments at fair value through net income.
•
This includes insurance contracts and investments.
•
If company elects fair value option for insurance
contracts then this would likely need to be backed out
for Regulatory Filing Purposes unless express
permission to use fair value accounting is obtained
from the BMA.
•
We believe electing fair option for investments is
largely consistent with existing regulatory model.
•
US GAAP also now requires enhanced disclosures
around how companies estimate fair value. Preferred,
but not required disclosure for regulatory financials
IFRS DEVELOPMENTS
•
SEC actively exploring possibility of allowing US
Registrants to switch from US GAAP to IFRS.
Captives to follow suit?
•
Would likely be accompanied by transition from
US to International Auditing Standards.
•
IFRS prefers insurance companies to discount
loss reserves. Also permitted under regulatory
rules but if company elects to switch from
nominal to discounted under IFRS we believe
this a should be discussed with BMA for
regulatory filings.
•
Longer term project to require all insurance
companies to report insurance transactions at
fair value under IFRS.
CANADIAN GAAP DEVELOPMENTS
•
Announced switch to IFRS in 2011
•
Recent changes in Canadian GAAP now
consistent with IFRS for investments allowing
recognition at fair value.
•
We believe statutory accounting would permit fair
value accounting for investments also.
Captive Manager Onsite
Inspections
OBJECTIVES:
 Evaluate the effectiveness and compliance of the
corporate governance and internal control systems of
the insurance manager and captive insurers
 Evaluate the effectiveness of the IT system,
particularly in relation to internal controls
 Assess compliance with the provisions of the Proceeds
of Crime Act 1997 and Proceeds of Crime (Money
Laundering Regulations 1998 (“the Regulations”) with
respect to identification, record-keeping, reporting, and
training procedures in relation to managing “regulated
institutions” as defined under Regulation 2(2)(a)(iv) of
the Regulations.
 Assess the insurance manager’s financial position and
adequacy of professional indemnity cover
OBJECTIVES cont’d:
 Assess the effectiveness of insurance management,
including the timing, adequacy and accuracy of the
management reports to the client Boards
 Ensure that the captives chosen for inspection meet
minimum solvency requirements on an ongoing basis
and that the funds available are able to meet
exposures for future years
 Assess the relationships with external entities such as
independent parties and affiliated insurance
management companies in other jurisdictions to whom
tasks are outsourced
 Determine whether the Insurance Manager has the
necessary combination of skills and experience to
manage captives. These will include both underwriting
(life and non-life) and administrative/accounting skills.
METHODOLOGY:
 Initial request for Insurance Manager documents
 Review information provided from document request list
 Interviews with key officials of the Insurance Management
Company and, where appropriate, the captives
 Financial records and minutes review of manager and
captives inspected
 Review of client files (sample selection by manager)
 Review of outsourcing arrangements
 Closing interview with key officials of the Insurance
Management Company
 Issue report to Insurance Management Company on
findings of the assessment
Thank You for Attending !