Balancing innovation and stability: Bermuda Monetary Authority’s stance on affiliate investments
A new approval process for affiliate investments forms a key part of the Bermuda Monetary Authority’s enhanced regulatory regime for long-term insurers and reinsurers.
The change to the technical provisions that govern long-term insurers and reinsurers was first raised in a consultation paper issued by the BMA last July.
That consultation period has now ended and the changes proposed therein are now operative through the applicable legislation.
Under the new technical provisions, Bermuda-regulated long-term insurers and reinsurers are required to obtain prior BMA approval for all “assets” with economic credit exposure to an affiliate, related parties, or connected parties of the insurance group.
This requirement applies to all long-term insurers, reinsurers and insurance groups, regardless of their use of the scenario-based approach for regulatory reporting.
The BMA’s enhancement aims to better protect policyholders and keep the industry stable by taking a closer look at deals where conflicts of interest may arise.
The term “assets” includes all investments and financial instruments, including any derivatives transactions with affiliates. This includes assets held in modified coinsurance accounts on the balance sheet of ceding companies, and there is no minimum amount.
Long-term insurers and reinsurers must look through the underlying counterparties to determine whether they are affiliates, related parties or connected parties.
A company is affiliated with another company if one of them is the subsidiary of the other or both are subsidiaries of the same company or each of them is controlled by the same person.
Related parties include companies that are related to each other, based on accounting rules like IFRS and GAAP, while connected parties cover all entities associated in any other way that could lead to a conflict of interest.
The BMA expects it would be a high bar for insurers, reinsurers or insurance groups to demonstrate that investments with economic counterparty exposure to affiliated, related, or connected party are appropriate for covering policyholder liabilities.
However, approval is not required if an affiliate helps to start up the investment without any ongoing financial ties.
Still, long-term insurers and reinsurers have to carefully look at the risks, such as potential conflicts of interest, in their own assessments.
To receive the green light for an affiliated asset or investment, long-term insurers and reinsurers have to submit a formal application to the BMA covering a range of criteria.
This should include, but is not limited to, an explanation of their investment policies, who makes the key decisions, how they handle any objections, what the potential conflicts are and how they are managed, how the terms are fair, how it benefits policyholders, what happens if they need to end the investment, how it helps other affiliates involved, what the exit plans are under stress, the investment details, the decision-making process, how it is valued, any internal or outside reviews, and even investments they considered but did not make and why.
This thorough checklist helps the BMA dig into the potential risks and impacts on policyholders.
This new requirement adds an extra layer of oversight for affiliate assets/investments. The BMA has explained that in its supervisory experience, affiliated, related or connected party assets can be complex and prone to a potential conflict of interest, creating additional risks and governance challenges.
The BMA is mindful of this and has implemented this requirement to help further cement Bermuda’s reputation as a leading insurance and reinsurance market.
Although Bermuda’s long-term insurers and reinsurers will have to do more homework upfront and will have to keep a closer eye on these investments, the main goal is to boost confidence and stability in the market.
Long-term insurers and reinsurers in Bermuda should consider the new requirement carefully and complete the necessary steps for approval as required.
Proactive engagement with the BMA is encouraged for complex or uncertain cases.
First Published in The Royal Gazette, Legally Speaking column, July 2024
