Collateralised Insurers (CIs) are designed to be utilised for transactions and structures that do not qualify for the special purpose insurer (SPI) and Class 3 insurer regulatory frameworks, particularly where insurers desire to transact with a greater variety of cedant types.
The SPI class of insurer was introduced in 2009. The consultation paper describes that since then, Bermuda’s ILS sector has grown to capture more than 70 per cent of outstanding global ILS issuance, and Bermuda’s wider alternative capital sector has grown to approximately 58 per cent of global insurance alternative capital capacity.
The industry has evolved to include more complex transactions and structures, sparking the desire to make use of leverage and transact with a greater variety of cedant types, including unrated non-affiliated cedants, which differs from the simple, limited duration catastrophe bond transactions that were common when the SPI regulatory framework was established.
Accordingly, the BMA proposes to establish a CI class to reflect the characteristics of the new structures. The regime for CIs will be somewhat similar to SPIs in that they will be able to write either long-term business or general business but cannot write both in the same entity. Unlike SPIs, CIs will be allowed to enter into transactions with unrated non-affiliated cedants.
The capital requirement for CIs will be the higher of USD250,000 and a risk-based capital requirement reflecting operational risk. The CIs’ regulatory reporting framework and statutory financial statements will be based upon audited US GAAP, IFRS or any other GAAP recognised by the BMA and CIs will be required to file these statements and the Declaration of Compliance provided for under the Insurance Act 1978 (Insurance Act). CIs will also be subject to the head office requirements under the Insurance Act.
Class IIGB Insurers
In addition to the introduction of CIs, the BMA has proposed to introduce a non-sandbox innovation class (Class IIGB) to address the innovation in the token economy (digital assets) adding to the insurance regulatory sandbox and insurance innovation hub introduced last year and further illustrating Bermuda’s willingness to adapt to the growing insurtech space.
The new Class IIGB is designed for insurer business models utilising digital assets (as opposed to all innovation which can be incorporated in the other classes, e.g. business models that provide indemnity coverage for digital assets in fiat currency can be appropriately regulated in another class). Nonetheless, the BMA will exercise a case-by-case assessment and is prepared to allow other innovations if the Class IIGB framework proves to be the most appropriate.
The insurance capacity for digital asset businesses is currently scarce. As the digital asset business sector becomes more attractive and as more jurisdictions introduce robust regulatory frameworks and legislation for digital asset businesses, the industry could see a growth in insurance indemnity coverage.
Like CIs, the BMA proposes that the Class IIGB insurer regulatory reporting framework and statutory financial statements be based upon audited US GAAP, IFRS or any other GAAP recognised by the BMA and will require Class IIGB insurers to provide for public filing of both these statements and the Declaration of Compliance.
Class IIGB insurers would also be required to meet the head office requirements and would be subject to a risk-based regulatory capital requirement arising from a model resembling the Bermuda Solvency Capital Requirement and a minimum margin of solvency requirement that would be the same as the Class 3A requirement.
In addition to the introduction of LPIs, the BMA proposes to introduce a new category of intermediary given the growing interest in the establishment of insurtech-related insurance marketplaces.
These latest proposed changes further signify that Bermuda is committed to address innovation in the insurance industry by creating a sound legislative and regulatory environment that appropriately protects policyholders while remaining conducive to product and technological innovation.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.