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Bermuda to tighten rules on commercial reinsurers

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SOUTHAMPTON, Bermuda—Large commercial insurance companies in Bermuda will be held to increasingly stricter regulatory standards, but Bermuda-domiciled captives won't face similar scrutiny, the island's regulators say.

While the jurisdiction has long advocated a "risk-based approach," to insurance regulation--where entities are regulated according to their risk level--international changes in insurance oversight are prompting Bermuda regulators to tighten regulation of its commercial reinsurance sector.

The European Union is scheduled to launch its "Solvency II" capital regime in 2010, which is expected to encourage insurers to base their capital on risk assessment models, while regulators in the United Kingdom have begun requiring insurers to perform individual capital assessments taking into account their risk exposure.

The International Assn. of Insurance Supervisors, which represents insurance regulators and supervisors in some 180 different jurisdictions, also is in the process of drafting standards for capital and solvency regulations.

As a result, the Bermuda Monetary Authority plans to introduce within the next year enhanced capital adequacy requirements for Bermuda reinsurers, said Jeremy Cox, executive director and supervisor of insurance at the BMA, the independent body governing insurers on the island.

Mr. Cox and other regulators spoke during the second annual Bermuda Captive Conference, held last month in Southampton, Bermuda.

As part of the newly proposed capital and solvency requirements, Class 4 reinsurers--or those underwriting direct excess liability or property catastrophe reinsurance risk--will be subject to additional standards based upon each company's particular risk profile.

According to the BMA, among the possible implications would be a required individual company economic capital analysis, applied on top of the current risk-based capital formula.

The current capital requirements, however, will continue to apply to all other classes of insurers (see chart).

The heightened attention to regulation of large insurance entities comes at a time of growth in Bermuda's reinsurance sector, marked by a surge of formations on the island in the past year, including more than a dozen startup reinsurers that have been launched in the wake of the devastating 2005 Atlantic hurricane season.

But the promise of strengthened regulation for large companies making Bermuda their home is not a deterrent, according to Mr. Cox.

"These companies are quite willing to accept more stringent requirements because they recognize the role they play internationally," Mr. Cox said during a panel discussion titled "Current Issues and Regulatory Update."

At the same time, Bermuda regulators are committed to ensure that the captive side of the market is not regulated as stringently as its larger counterparts, Mr. Cox said.

Bermuda has chosen to "adopt a much lower level of supervision for a captive," he said.

In terms of the inherent level of risk involved, there is "no comparison" between a Class 1 or Class 2 insurance company compared to a large, commercial reinsurer, Mr. Cox stressed.

Bermuda's Premier, W. Alexander Scott, as part of his opening remarks for the conference, noted that the "government has not considered placing limits on the number of captives here" and has no plans to do so in the future.

Approximately 70% of active insurers licensed in Bermuda are captives, according to data from the BMA. As of year-end 2005, there were an estimated 987 captives, according to Business Insurance estimates based on BMA data (BI, March 6).

"The captive market is a sophisticated market," said Alan Cossar, deputy chairman of Bermuda's Insurance Advisory Committee, a statutory body that operates under Bermuda's 1978 Insurance Act and advises the Minister of Finance on insurance industry matters in Bermuda.

There is a "need for international bodies...to recognize that because a system is less intrusive doesn't mean it's less effective," Mr. Cossar said.

While regulators internationally are working on enhancing and standardizing regulation for large commercial companies, standards of regulation for captive companies have yet to be established, Mr. Cox noted.

Among other things, Mr. Cox, during the panel discussion, called for a meeting of all major heads of captive domiciles internationally to discuss captive regulation.