The Bermuda Monetary Authority is aiming to introduce a new insurer class for parametric risk in the fourth quarter, several months later than its original target.

In a stakeholder letter dated September 16, the regulator said it was drafting amendments to the Insurance Act 1978 to create the parametric special purpose insurer class. It also plans to publish detailed guidance on the final requirements at that time.

The authority had previously expected the legislation to take effect before the end of the second quarter of this year, after launching a consultation in January.

The new class would provide a dedicated, fully-collateralised framework for re/insurers writing parametric business, meaning cover that pays out when an agreed trigger like wind speed, rainfall or an earthquake measurement, is reached. It can help individual policyholders and governments more quickly rebuild after a disaster, such as after last year’s Hurricane Melissa, which triggered a full payout of Jamaica’s $150 million catastrophe bond with the World Bank.

The BMA said the new framework would complement, rather than replace, existing insurance classes. Companies already writing parametric risks under another Bermuda licence would not have to relicense or move that business into a PSPI, it added.

“The proposed framework is not intended to disrupt existing operations,” the authority said.

The letter follows feedback from the industry, who wanted more clarity on the types of transactions the new class could cover, eligible participants, acceptable collateral and the role of third-party providers that validate data and triggers.

The BMA said the PSPI regime would support “structured, fully-collateralised parametric risk transfer” and would focus on the substance of the risk transfer rather than the legal form of the contract.

That means the framework could accommodate reinsurance contracts, derivatives and swaps, if they meet the applicable legal and regulatory requirements.

The authority said all parametric contracts written by a PSPI would need to demonstrate insurance risk-transfer characteristics, use transparent triggers and have suitable governance and collateral arrangements.

It added that a PSPI may, on a case-by-case basis, be allowed to write both conventional indemnity business and parametric business, if it can demonstrate that it is capable of managing both.

The BMA is also considering whether existing SPIs that reclassify as PSPIs could benefit from any introductory fee waiver available to new applicants.

Eligible collateral is expected to include cash, cash equivalents and letters of credit. The authority said it was reviewing whether to permit a limited expansion to other assets, but stressed that collateral must be high quality, readily realisable and enforceable to meet obligations quickly after a trigger event.

The regulator will issue further guidance on the meaning of terms such as “sophisticated participants”, as well as standards for independent data providers and third-party validators.

Transactions that fall within a PSPI’s approved business plan would not require additional pre-approval under the authority’s preliminary approach. However, companies would need to engage with the BMA before entering transactions outside those parameters.

The move has been under development for about a year.The Royal Gazette first reported in October that Taijaun Talbot, the BMA’s assistant director of supervision, told ILS Bermuda Convergence delegates that the regulator was in an advanced stage of developing a new SPI class for parametric triggers. The BMA formally consulted on the proposal in January.