Thomas B. Leonardi, former Insurance Commissioner for Connecticut, says Bermuda has taken the regulatory high road in creating an insurance regulatory framework that matches the highest international standards — and praises US regulators for pushing others to follow suit.

The National Association of Insurance Commissioners in the United States recently took an important step that has so far mostly been discussed in regulatory circles, but which is significant in advancing the safety of the insurance system.

In a memo released as part of the agenda for the NAIC's National Meeting last month, the NAIC’s Life Risk-Based Capital Working Group has been directed to develop an additional capital charge for business reinsured outside of reciprocal jurisdictions.

Notably, one such jurisdiction that the capital charge would apply to today is the Cayman Islands, where reinsurance activity has surged, and concerns about transparency and regulatory rigour have grown.

The NAIC memo represents an acknowledgement of a principle that regulators around the world have increasingly embraced for years: not all regulatory jurisdictions present the same level of risk.

The European Union reached that conclusion years ago through its Solvency II equivalence process. The United Kingdom and Japan have adopted similar approaches through newly issued guidelines. The United States has done the same through its qualified jurisdiction and reciprocal jurisdiction frameworks.

These processes were created for a simple reason. Cross-border reinsurance works best when regulators can have confidence that another jurisdiction provides supervision, transparency, capital standards, and policyholder protections that are substantially comparable to their own.

Bermuda made a deliberate decision years ago to pursue qualified jurisdiction status and then reciprocal jurisdiction status. These were not check-the-box exercises.

Bermuda invested heavily in regulatory resources, strengthened its solvency framework, enhanced governance standards, and adopted increasingly robust public disclosure requirements. It embraced international supervision and worked collaboratively with regulators around the world.

The result is a jurisdiction that today enjoys recognition from the European Union and the NAIC because it demonstrated that it holds policyholder protection as paramount.

Those recognitions were earned, not automatic. The NAIC’s recent memo simply extends that same philosophy into the capital framework. If jurisdictions have different regulatory standards, then the risks associated with those jurisdictions should not automatically receive identical capital treatment.

This sound regulatory approach should not be viewed as punitive. The NAIC memo is not directed at one jurisdiction, nor should it be.

The Cayman Islands has received considerable attention because of rapid growth of the jurisdiction's life and annuity sector, but the proposal applies to every jurisdiction that has not demonstrated regulatory equivalence through the reciprocal jurisdiction process.

The NAIC’s action creates an important choice for jurisdictions between two paths. One path is to maintain the current regulatory framework and accept that insurers may face higher capital requirements, together with the market perception that comes from operating outside the group of recognised regulatory regimes. The other path involves building a robust regulatory apparatus, as Bermuda has already demonstrated is achievable, through deliberate and sustained work and investment.

From my perspective as a former insurance commissioner, the following are especially important:

• Strong transparency and public disclosure

• Capital requirements that focus on quality capital and are comparable to those applied domestically

• Meaningful investment in the regulatory expertise necessary for a sophisticated, technical area of financial regulation

• Robust recapture protections

• Overall regulatory consistency and predictability

Policyholders purchasing retirement products deserve confidence that the regulatory protections surrounding those promises remain strong regardless of where the reinsurance resides.

Insurers deserve confidence that reinsurers in other jurisdictions operate under robust and transparent supervision. Markets deserve confidence that capital requirements appropriately reflect differences in regulatory risk.

The NAIC's laudable direction on this issue holds true to these principles. Rather than viewing these developments as a barrier, jurisdictions still seeking reciprocal recognition should view them as an invitation.

Bermuda has already demonstrated that the destination is well worth the journey.

• Thomas B. Leonardi is a former Insurance Commissioner for the State of Connecticut. He previously served on the executive committees of the NAIC and the International Association of Insurance Supervisors. He serves as an independent director on the boards of The Travelers Companies and ACRA. The views expressed in this piece are his own and do not represent the views of any organisation he is affiliated with