Solvency II masterstroke: now that’s collaboration
When Bermuda reaches a world-class level in any field, it is something that should be celebrated. Last week, this scale of achievement occurred, but it would have gone unnoticed by many. There were no medals awarded, no pomp and ceremony.
That’s perhaps because the great accomplishment in question came in the unglamorous area of insurance regulation.
To the uninitiated, “Solvency II equivalence” sounds like something so complicated and arcane that it’s not even worth trying to understand. However, this new status has profound relevance for this island, and not only in the tangible benefits that it provides for our flagship insurance industry and the many livelihoods it supports. We can also take heart from the manner in which it was achieved, a marathon team effort that transcended political rivalries and differences between public and private sectors to beat sizeable odds.
What equivalence means is that the mighty European Union views the standard of insurance regulation in Bermuda as being at the same level as the new and enhanced EU insurance rules, known as Solvency II. The rules raise the bar for insurance companies not only on solvency, but also understanding of the risks they are covering and their standard of corporate governance. The main aim is to ensure that insurers can meet their obligations to policyholders and decrease the likelihood of insurers collapsing under the weight of hefty claims.
It may seem strange that Bermuda, which ten or 15 years ago was known for “light-touch regulation” that many a start-up reinsurer found attractive, should take a road that led to a regulatory regime in line with the world’s toughest. But the world has changed during that time and Bermuda has had to change with it.
Distrust of banks surged after the 2008 global financial crisis and governments around the world responded with waves of new regulations intended to make them behave more like responsible custodians and less like casino gamblers. The insurance industry, with the notable exception of US bailout beneficiary American International Group, came through the test of the crisis quite strongly. However, that did not prevent insurers from getting their own share of new red tape.
Even before 2008, the rapid growth and expanding geographic reach of Bermuda’s reinsurance industry were becoming apparent. Many could see by then that perceived “light-touch regulation” was no longer appropriate for an industry whose scope and sophistication was growing beyond its catastrophe reinsurance beginnings. The industry was outgrowing its regulator, the Bermuda Monetary Authority, which was not equipped to provide the oversight that an industry of such global significance warranted.
One luminary, Evan Greenberg, was outspoken about the need to address this back in March 2007. At the time, Mr Greenberg, then the chief executive officer of Ace Ltd, said the island needed world-class regulation to maintain its place as a leading insurance centre. Investors, he said, were concerned about Bermuda’s “legitimacy and permanence” and feared the potential damage that could be caused by politicians “who perceive Bermuda as a destination where companies are allowed to game the tax system or where regulation is light”.
Mr Greenberg added: “The long-term competitiveness of Bermuda as an insurance market could be threatened if it is not considered a leader in modern regulation, with the improved image of legitimacy this brings.”
These words could help to explain why, over the nine years since, so many put in such a monumental effort to attain the Solvency II equivalence that became official last Thursday. Matthew Elderfield, a high-flying regulator from Britain brought in as CEO to modernise the BMA, set the ball rolling. He was succeeded at the start of 2010 by Jeremy Cox, a Bermudian BMA veteran.
Mr Cox masterminded the equivalency campaign, which included persuading numerous EU bureaucrats and politicians that Bermuda was a serious financial centre whose reinsurers provided coverage to European interests on a meaningful scale. Given the widely held view in Europe that Bermuda is nothing more than a tax haven, this in itself was no easy task.
Finance ministers in successive governments, Paula Cox and Bob Richards, made regular trips to Brussels over the past six years for the equivalency cause, as did Sir Richard Gozney, a former governor. Mr Cox successfully won exemptions from Solvency II for the island’s captive insurance sector. He worked with his team to fashion a set of rules that would be viewed by Europe as equivalent, but which would be workable and appropriate for the Bermuda market. The bureaucrats found flaws in Bermuda’s initial approaches and the BMA was forced back to the drawing board. Bermuda’s insurers were fully behind the effort and recognised its importance to the island’s future.
Mr Cox said his BMA team recognised that “what we do can aid Bermuda’s survival or cause Bermuda’s death”. Certainly, much was at stake. Failure to gain equivalency would have left Bermuda reinsurers competitively hamstrung when doing business in the EU. The corporate relocations and restructurings this might have prompted would have cost jobs on the island, weakened our market and diminished our global relevance. The industry appears to be on the path to a global standard of regulation and failing to make the grade at this stage could have proved devastating.
Damage to the international business sector that directly generates more than a quarter of our gross domestic product would have harmed the numerous livelihoods that depend on its continuing success. Instead, we are now ahead of the curve. We can celebrate equivalence which tells the world that Bermuda is truly a world-class insurance centre. XL Group’s plans to move its corporate base from Ireland to Bermuda, with equivalency cited as a significant factor, speak volumes about the value of our new status.
Mr Cox and all the people who helped to pull off this momentous achievement have done Bermuda a great service. And they showed the amazing things Bermuda can achieve on the world stage when we all pull together behind a common goal.
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