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Bermuda’s Solvency II equivalence advantage

A study of Bermudian English might come across the question “who are your people?”

Those familiar with the parlance of old Bermuda may recognise this as asking for general background information on one or more of: family name, location of homestead, names of parents and occupations, location and or marital status of aunts and uncles, cousins, etc. In essence, the question drives to the root of the respondent's background.

Based on recent efforts in the insurance regulation space, if this question were posed to the Bermuda Monetary Authority (BMA), Bermuda's regulator of financial services, they may very well add “the European Union” in their response. The reason for this is due to the recent development toward Bermuda's equivalence under Solvency II.

This article will attempt to address the background and basics of Solvency II equivalence: how it came about, how it relates to Bermuda, and why it is good for Bermuda in the overall context of insurance regulation.

‘Solvency II' refers to a European Union Directive (2009/138/EC) relating to insurance regulation. (For those of you needing an EU jurisprudential refresher — a Directive is a legislative act mandating member state adherence, but allowing for implementation to be overseen by the respective member state.)

Solvency II will become effective on 1 January 2016 and provides new rules with respect to capital requirements, governance, risk management, and disclosure in relation to insurers and reinsurers.

The regulatory changes resulting from the implementation of Solvency II include, but are not limited to, the following three pillars:

• How insurers quantify their liabilities and assets, including the way a company reserves funds to satisfy policyholder claims.

• How the structure and management of insurance businesses are governed, enabling insurers to identify, quantify, monitor, successfully manage and report risks to which they are exposed.

• Ensuring that robust reporting and disclosure rules are in place to foster transparency for insurers reporting on their business.

Following a demonstration of interest from the BMA, the European Commission tasked the European Insurance and Occupational Pensions Authority (EIOPA) in 2010 to provide a preliminary assessment of the BMA's supervisory regime. The goal was to have EIOPA determine whether the BMA's supervisory regime satisfied the general criteria for third-country equivalence (i.e. non-EU member state equivalence).

In an effort to gain equivalence, the BMA has, over a period of six years, fortified and revised its approach to insurance regulation in such a way as to bring the regulation of Bermuda's commercial insurers (ie those registered as Class 3A, 3B or 4, C, D or E) in line with Solvency II.

In several follow-up reports, EIOPA advised that Bermuda's regulatory framework for commercial insurers was broadly equivalent with the Directive, paving the way for formalisation of equivalence. This came in the form of a delegated act adopted by the European Commission on November 26, 2015 (Delegated Act).

The Delegated Act will come into force on 1 January 2016 (subject to a three-month review period by the European Parliament and European Council), and grants full equivalence to Bermuda for an unlimited period.

In summary, the Delegated Act is essentially the EU conveying that they acknowledge the Bermuda commercial (re)insurance and group supervisory regimes to be equivalent to that of the EU, and on that basis, Bermuda (re)insurers and groups are free to conduct business in the EU without additional regulatory requirements/burdens.

The BMA's approach to insurance regulation is not strictly EU-centric. International regulatory input is derived, in part, through membership in various international standard setting bodies relating to insurance regulation such as the International Association of Insurance Supervisors (IAIS), the International Organisation of Securities Commissions (IOSCO), and the Group of International Insurance Centre Supervisors (GIICS). The BMA has also entered into a multilateral memorandum of understanding with, and is a charter member of, the International Association of Insurance Supervisors (IAIS).

Locally, the BMA is able to derive input from a variety of sources including insurance and reinsurance companies, law firms and other organisations such as the Association of Bermuda Insurers and Reinsurers (ABIR), the Bermuda International Long-Term Insurance and Reinsurance Association (BILTIR), and the Bermuda Insurance Management Association (BIMA) to name a few.

With the Delegated Act passed and soon to be in-force, Bermuda registered (re)insurance companies and groups are able to conduct business freely within the EU, and on an even playing field with existing EU insurance companies. As the economic output of the EU represents a quarter of the global economy (measured in terms of GDP), ease of operations for our (re)insurers and groups in the EU is an important asset, one that many competing offshore jurisdictions are without.

The above network of standard setting, support, and supervisory bodies in addition to Solvency II equivalence serves to further enhance the reputation of Bermuda as a premier (re)insurance marketplace.

Lawyer Matthew Carr is an Associate and a member of the Corporate Practice Group at Appleby. A copy of this column can be found on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

Even playing field: Solvency II equivalence means Bermuda reinsurers will be able to business in the European Union without being at a competitive disadvantage

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Published December 10, 2015 at 8:00 am (Updated December 09, 2015 at 10:20 pm)

Bermuda’s Solvency II equivalence advantage

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