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Hope that Bermuda captives may be spared Solvency II-type supervision

Hopes have been raised that Bermuda will be able to secure regulatory equivalency with new European solvency rules for its major commercial re/insurance sector without having to impose the same stricter rules on its captive insurance sector.

Industry expert Richard Lightowler, of KPMG, suggested yesterday that the draft report on Bermuda’s bid for Solvency II equivalency, published on Tuesday by the European Insurance and Occupational Pensions Authority (EIOPA), made provision for “segmented equivalency”.

Mr Lightowler, who is the lead partner in KPMG’s insurance department in Bermuda, said the EIOPA’s preliminary assessment that Bermuda was largely equivalent with Solvency II on each of the three assessment criteria for the commercial insurance sector was “a tremendous result for Bermuda”.

“It reflects the substantial effort the Bermuda Monetary Authority, and indeed the market, has made in the development and adoption of the enhanced regulatory regime in Bermuda as well as the appetite for both constituents to meet global standards,” Mr Lightowler said.

“Of real significance is the fact that the draft essentially provides for segmented equivalence, that is, equivalence for the commercial sector without requiring the unnecessary burden of a Solvency II equivalent regime for the captive sector.

“All constituents of the market should be able to take comfort that they will be appropriately regulated. The commercial sector will be required to meet the exacting standards of Solvency II, with the Class 1, 2 and 3 companies continuing to be regulated commensurate with their limited purpose and therefore risk.

“In my view this outcome truly reflects the concepts of risk-based and proportionate regulation.”

The BMA has been working on enhancements to the Island’s insurance regulation regime to win “third-country equivalency” and is one of the first jurisdictions, along with Japan and Switzerland, to be assessed for it by the Europeans. Success would mean that Bermuda-based insurers and reinsurers would not be competitively disadvantaged in the European Union market.

The repercussions of equivalency for the captive sector have not yet become clear, but if the stricter capital and corporate governance standards required under Solvency II were applied to captives, the changes would make Bermuda less competitive as a captive jurisdiction. None of the Island’s main captive domicile rivals, such as the Cayman Islands and Vermont, have applied for Solvency II equivalency.

Captive managers argue that their business, principally or exclusively providing insurance for their own parent corporations, is significantly less risky than the third-party underwriting carried out by the large Class 3B and Class 4 commercial re/insurers and so should not be subject to the more stringent Solvency II rules.

If the BMA can apply “segmented equivalence” in the way Mr Lightowler described, it will be good news for the captive sector.

Tom McMahon, of the Bermuda Insurance Managers Association, an organisation which represents the captive industry, is cautiously optimistic.

“I believe the EIOPA report contains welcome indications for the Bermuda market,” Mr McMahon said yesterday.

“For our commercial sector, the news is very positive for equivalence. For our captive sector, I think that the fact that the distinction has been made by EIOPA between our commercial sector and our captive sector is a significant development and obviously makes sense when one looks at the entirety of the Bermuda market.

“Obviously it is early days yet and the final decision on equivalence does lie with the European Commission and BIMA will continue to monitor developments.”

Asked for its view on this aspect of the EIOPA paper, the BMA said in an e-mailed statement: “EIOPA has appropriately recognised the diversity of the Bermuda market by providing views on both captive and commercial insurer supervision in Bermuda.

“This was not unexpected, given the significance of both segments of the market here, and it was useful to note EIOPA’s recognition that the Bermuda captive market has a strong focus on the US as opposed to the EU market. We were also pleased to see EIOPA acknowledge the important role Bermuda re/insurers play in European markets.

“It is important to note, however, that this report marks the very beginning of the review and approval process for Solvency II equivalence. The EU Commission will make the final decisions as to the equivalence or non-equivalence of third country regimes.”

Mr Lightowler believes this will help to answer at least clear up some of the doubts about how equivalency is likely to impact the Bermuda market.

“Whilst a lot of work still lies ahead, particularly around economic balance sheet and long-term insurers who were scoped out of the report, this draft advice should go a long way to remove much of the regulatory uncertainty that has existed for some time,” Mr Lightowler said.

“We should also not forget that a number of European regulators have themselves a lot of work to do ahead of Solvency II becoming effective.

“At a time when there is much turmoil in the financial markets and the temptation for over regulation is great, all market constituents should feel positive about this report.”

EIOPA was assessing on three criteria: solvency, solvency in the context of the European Economic Area and group supervision. The full consultation document is attached under the title of “Related Media” under the online version of this story on

The Royal Gazette website (www.royalgazette.com). EIOPA has invited comments on its views by September 23.

The final decision on equivalency will be made next year by the European Commission.

Richard Lightowler: KPMG's lead partner, insurance

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Published August 19, 2011 at 2:00 am (Updated August 19, 2011 at 10:02 am)

Hope that Bermuda captives may be spared Solvency II-type supervision

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