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Consultants: new BMA standards should be embraced

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Good practice: Marc Loh, director, FTI Consulting (Photograph supplied)

Long-term (re)insurers in Bermuda need not fear impending changes to the regulations that govern them, leaders of a global business advisory firm have said.

Senior managing director Simon Grout and director Marc Loh, of British-based FTI Consulting, said two consultation papers issued by the Bermuda Monetary Authority contain nothing to fear.

Mr Loh, delivering a message to the Bermuda market, said: “They should embrace it, and I think they should support quite a lot of this. Don’t be scared of it. It is good practice. It will make the business better, and will manage the risk associated with the business a lot better.”

The BMA papers focus on enhancing the regulatory regime for the long term business of life insurers and reinsurers. Changes are expected to be in force by January 1.

Mr Grout and Mr Loh said: “In our view, this marks the latest step in the BMA’s efforts to align its regulatory standards to be consistent with the leading insurance regimes globally, which is important in the context of maintaining its preferential status as a reinsurance hub for insurers in Europe, UK and US.”

FTI said some of the areas covered in the consultation include:

• Separating the capital calculation for lapse risk and expense risk (previously grouped under “other insurance risks”)

• Enhancements to the approval framework for technical provisions calculated under “scenario-based approach” which typically applies to long term insurance liabilities including material strengthening of liquidity risk management requirements, governance and risk appetite frameworks and assessment of the significance of lapse risks, as well as enhancement to modelling and stress testing standards

• Removal of diversification benefits across insurance entities for the purpose of calculating risk margins for insurance groups

They said: “It is too early to be certain of the precise impact of the regulatory changes, but based on our analysis and discussions with clients, this may result in some increase in capital requirements which needs to be managed.

“More importantly, it is likely to have a material impact on the pricing and capacity for new business.

“Significant investment in building out governance capabilities will also be required.”

Mr Grout and Mr Loh added: “What is also clear is that the impact will vary significantly across different insurance products.

“For example, lapse and asset return sensitive products will be impacted more than pure mortality or longevity sensitive products, which will alter the relative attractiveness of different types of insurance and reinsurance solutions (such as funded reinsurance solutions vs longevity swaps in the context of UK bulk annuities).”

Mr Loh said: “It is also worth noting that the BMA is not working in a vacuum here. Funded reinsurance is very much on the radar screens of the UK’s regulator and it is an area of potential concern for them in terms of their ability to regulate the insurers here and their ability to look through into the risks that the insurers are taking through their reinsurance contracts over in Bermuda, as well.

“It’s a complex web of different regulators having different agendas, and the BMA is in some sense actually responding to the needs and the evolution of other markets.”

Mr Grout said: “The UK regulator came out with an eight or nine page letter on funded reinsurance back in the middle of June around some of the things which the BMA are addressing. It can’t be a coincidence that the two look reasonably close in content to each other.”

They said: “More broadly, we don’t see this as a ‘once and done’ regulatory change but part of a wider (and necessary) evolution of the BMA regulatory regime in order to keep pace with global trends in insurance regulation.

“It will be interesting to see how insurers and reinsurers react to the emerging environment and how other reinsurance jurisdictions respond in time.”

Simon Grout, senior managing director, FTI Consulting (Photograph supplied)

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Published November 06, 2023 at 7:59 am (Updated November 06, 2023 at 7:30 am)

Consultants: new BMA standards should be embraced

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