The Bermuda Monetary Authority is to introduce an enhanced regulatory and supervisory regime for commercial insurers primarily focused on long-term (life and annuity) insurers.

The changes, which are to become effective on March 31, follow two consultation papers issued by the BMA in 2023 that set out the proposed enhancements.

The new regime addresses concerns expressed by the International Monetary Fund, as well as other financial regulators, that have arisen with the growth of private equity-backed insurers in the provision of retirement protection.

Acknowledging that PE insurers have contributed to narrowing the protection gap, the BMA also noted that PE insurers’ access to unique expertise had allowed many to earn higher yields through investment in a higher proportion of illiquid assets.

The BMA wrote in the recent paper Supervision and Regulation of PE Insurers in Bermuda that “the tendency to invest in higher proportions of illiquid assets, which are subject to valuation and concentration risks and the potential for opacity, conflicts of interest and non-arm’s length transactions between the PE firm and the insurer, requires special attention from regulators”.

Later, it added: “To put it simply, PE insurers require an intensified supervisory engagement.”

A concern around PE insurers holding illiquid assets, the BMA said, is that they “run the risk of being forced sellers of such assets [at potentially steep haircuts] in order to meet liquidity needs”.

The BMA said it “reviews PE insurers’ use of illiquid assets as part of the insurer licensing process, the transaction approval process and quarterly and annual [or more frequent] filings, as well as ongoing day-to-day supervision including through conducting targeted deep dive on site prudential reviews”.

The regulatory enhancements coming into force at the end of March relate to use of the scenario-based approach to make it more restrictive and only available to insurers that can demonstrate robust risk management of their asset-liability portfolios; approval of structured, affiliated and connected assets; prescribed default and downgrade costs as well as increased risk sensitivity on the lapse risk capital requirements.

The BMA noted that the enhancement changes to the scenario-based approach “will likely have a significant quantitative impact on the Bermuda market. Firms will have to make a considerable investment [eg, governance, model risk management, systems, reporting, people etc] in order to qualify to use the SBA and pass the ongoing more intrusive supervisory approach and standards”.

Speaking more generally of the various enhancements that come into force on March 31, the BMA wrote: “These enhancements will further strengthen ALM [asset and liability management], balance-sheet resilience, application of the prudent person principle and liquidity risk management all of which are core to the management and supervision of risks on the balance sheet of long-term PE insurers.

“The authority has identified and provided supervisory and regulatory responses to a number of PE-specific challenges around the structure of cross-border transactions and the arm’s length nature of these, conflicts of interest, investment in illiquid assets and compliance with the prudent person principle, lapse risk and the valuation of technical provisions and regulatory differences.”

The provisions that become effective on March 31 are a continuation of the BMA’s ongoing review of its regulatory and supervisory framework to address risk.

Since last January, the BMA has required prior approval of all long-term block reinsurance transactions and will decline transactions if the reinsurer is unable or unwilling to address concerns raised by the regulator.

In addition, should the BMA or cedant’s regulator conclude that the Bermuda reinsurer is not assigning adequate capital to support the ceded risk, it will either decline the transaction or apply a capital add-on.

Importantly, the BMA said it would not approve a transaction that the cedant’s regulator did not support.

Since last January, the BMA has required prior approval of the scenario-based approach for new entities and has introduced liquidity stress testing. In the latter regard, companies’ first reporting requirement was at the end of December.

Under that testing, illiquid assets are assigned a nil value for liquidity stress testing purposes.

PE insurers are also required to carry out their own risk and solvency assessment, and file the self-assessment with the BMA.