15 Dec Turning obstacles into opportunities for progress
Craig Swan, Deputy CEO, Bermuda Monetary Authority, vouches for Bermuda’s strong stance against current and future challenges.
What is your analysis on the dynamism of Bermuda’s (re)insurance and financial services market to date?
Bermuda has a history of expanding its capabilities to make space for a wider array of financial services participants. Our lead captive position has undoubtedly been reinforced by our rank as one of the three largest reinsurance centres globally. The BMA further secured Bermuda’s pioneering reputation by positioning Bermuda as ground zero for all things Insurance-Linked Securities (ILS). For over 20 years, we have worked with and balanced the views of underwriters, policyholders and capital providers to build a robust, progressive framework of oversight and supervisory practices, fostering the sector’s growth and innovation in a pragmatic way while focusing on protecting policyholders.
Moving in lockstep with industry—recognising progress, adjustments and innovation and implementing pragmatic legislative and policy outcomes— has helped foster Bermuda’s position as the global leader in alternative capital. Of the USD 90 billion of capital in the global ILS market, 70 percent is issued from the island—approximately 60 percent when alternative capital is considered more widely (including ILS, collateralized reinsurers, sidecars, etc.).
Bermuda has an appetite to adapt and intentionally innovate. This is true of our financial services industry and the BMA as we adapt regulatory regimes to industry developments.
What was the impact of COVID-19 on Bermuda’s insurance industry? What new opportunities have emerged during this time?
Alongside the rest of the world, Bermuda felt the impact of COVID-19. The BMA was able to seamlessly transition to working on a fully remote basis, maintaining all of our functions— including licensing—at levels that are comparable to us being in-office. Bermuda’s financial institutions entered the crisis in a strong solvency and liquidity position. This strong position and the expectation that our international business sector will remain strong is a large part of why Bermuda’s S&P sovereign rating was maintained at A+.
New licensing activity is a good litmus test to gauge the industry’s position throughout 2020. This activity continued at a strong pace throughout 2020, with our registration statistics highlighting 67 new formations by the end of the year. These statistics further underscore the resilience of the jurisdiction as we compare these numbers to the prior year (when we had 58 formations).
For Bermuda’s insurance industry, though, it has never been about maintaining ‘business as usual’. It is about reframing challenges as opportunities. Moving past this pandemic is no different. Opportunities will emerge in certain lines, such as cyber, as the threat surface expands due to digital transformation, business interruption and other lines that require a tailored coverage, or where there is limited capacity or significant price hardening. We also expect captive opportunities to arise from coverages that become more restrictive in reaction to COVID-19. The Bermuda market is well placed to continue helping businesses and individuals manage these and other risks in these turbulent times.
What are the major changes you see happening in the regulatory environment for financial services? What has been the BMA’s role in maintaining Bermuda’s financial services industry compliance with international regulation? What is the significance of Bermuda being moved by EU to the ‘whitelist’?
While the specific developments in the financial services’ regulatory environment shift, the general theme and pace of change remains the same—increasingly complex. Climate change, digital transformation and geopolitical risk, to name a few, make this an all but certain truth for the future. This is something we have prepared for in our strategic planning, made evident in our recently published 2021 Business Plan.
In terms of climate change, we have begun exploring how it should be integrated into our regulatory framework through engagement with industry and our international peers. However, climate change is only the first sustainability priority for a newly launched Environmental, Social and Governance (ESG) working group, who will oversee the other aspects of ESG integration into our framework in the future.
While digital transformation is not a new development in financial services regulation, it is becoming a more central theme for regulators, both in terms of our own processes and our oversight responsibilities. For our processes, the development and integration of purpose-built RegTech and SupTech solutions will allow us to appropriately regulate our registrants while reducing their compliance costs and ensuring a sustainable business model. We also understand that while technology can empower our work, it is the people behind that technology that ensure it is used to its highest potential. Therefore, we are reconfiguring our human resource pool to further enhance our efficiency and productivity. For our oversight responsibilities, it is becoming increasingly important to further hinge our regulatory regime on the understanding of and accounting for digital transformation risks so that we can maintain our risk-sensitive and fit-for-purpose framework— something which we have already started addressing through such measures as our Operational Cyber Risk Management Code of Conduct.
Another practice we have always and will continue to focus on—which significantly contributes to our reputation—is compliance with international standards. Through these continuous efforts, our regime remains internationally recognised and respected on both sides of the Atlantic, allowing licensees to conduct cross-border business free from competitive disadvantage. Looking to our east, the BMA was the first non-European jurisdiction to earn equivalence to the EU’s Solvency II directive—a designation that enables our (re)insurers to conduct business within the EU as if they were domiciled there. Maintaining compliance has been an equally essential objective. Our efforts, to name a few, include steering Bermuda’s banking sector into full compliance with the Basel III accord and contributing to Bermuda’s Caribbean Financial Action Task Force (CFATF) Mutual Evaluation Review (MER) process.
Finally, there is our work regarding economic substance. The Authority was able to work in close collaboration with the regulator responsible for economic substance, the Registrar of Companies (ROC), to support Bermuda’s efforts of addressing international pressure to revise the relevant requirements. Our work on investment funds assisted in Bermuda’s removal from the EU’s ‘grey list’ of non-cooperative tax jurisdictions and subsequent 2020 confirmation on the ‘white list’. We continue to work alongside the ROC to ensure that Bermuda maintains the intent driving economic substance.
What has been the BMA’s role in Bermuda’s fight against money laundering and terrorist financing?
Every effort the BMA has made regarding Anti-Money Laundering/Anti-Terrorist Financing (AML/ATF) speaks to alignment with international standards and national collaboration. The ultimate outcome of this is reflected in Bermuda’s MER. This outcome showcases the BMA’s ability to execute appropriate supervision and to support national initiatives through our extensive collaboration with a number of Bermuda stakeholders including, but not limited to, the Office of National Anti-Money Laundering Committee (NAMLC), the Ministry of Finance, the Financial Intelligence Agency, the Registrar of Companies and the private sector.
The BMA’s role in the CFATF MER was an ‘all hands-on deck’ effort from the BMA’s AML, Policy and International Affairs, Legal and Enforcement, Operations, Corporate Authorisations, Licensing and Authorisations, Insurance and Banking, Trust, Corporate Services and Investment Departments. The evaluation was an extended process, starting with our first submission in March 2018, an on-site in September 2018, follow-up meetings in July 2019, and the MER review and approval by the CFATF Plenary in November 2019, which was published by the Financial Action Task Force (FATF) in 2020.
Peer members of the CFATF assessed Bermuda’s compliance with the FATF standards and ranked Bermuda’s AML/ATF measures amongst the highest of any peer-reviewed jurisdiction. To date, of more than 100 FATF-published MERs, Bermuda’s technical compliance rating is the highest of any jurisdiction. Additionally, Bermuda has remained in the top six of all MERs in terms of effectiveness requirements. These results, approved by the AML/ATF international standard-setting body, establish Bermuda’s position among the global leaders in the fight against money laundering and the financing of terrorism and proliferation.
What is Bermuda’s insurance sector’s role in the protection against system risks? What are the initiatives the BMA is currently pursuing to collaborate towards protection from systemic risks such as pandemics?
Many well-respected voices claim that climate change is a key development driving a steady increase in natural disasters. If there is truth in this claim, and there are compelling reasons to believe it, then crucial lessons follow. First, the matter should be addressed at a global level. Second, and simultaneously, efforts should be put in both preventing climate deterioration and mitigating its effects.
Bermuda has been a key participant in these efforts by acting as a global centre of insurance and reinsurance for these risks, ranging from mortality rate spikes and COVID-19-trigger morbidity to more severe and more frequent weather disasters, such as hurricanes and wildfires.
Bermuda’s positioning as a leader in potentially systemic catastrophic risk transfer did not happen overnight. While these industries are growing, they are more importantly growing in a stable manner. One pillar of stability is the fact that a large number of mid-sized specialised carriers comprise our hub. Another pillar of stability stems from the expertise our island nation hosts.
At the BMA, we are very aware of Bermuda’s (re)insurance sector’s critical importance. Its global reach and dynamism demand a robust regulatory and supervisory system that observes international standards and enables us not only to safeguard policyholder protection and financial stability but also to fluidly interact with other supervisors across borders. We have found that the best way to deliver on this is by nurturing digital technology’s contribution to business models and practices. Thus, we have equipped ourselves internally and externally. Regarding the former, we have built bench-strength with digital and technology subject matter experts, alongside an advancing deployment of technologies that empower our processes. Regarding the latter, our FinTech regulatory framework enables the incorporation of sound digital technologies, from big data and artificial intelligence to the business of (re)insurance and digital assets.
What is the relationship between innovation and regulation in the Bermudian and global marketplace?
The digital transformation of financial services creates an opportunity and a need for evolution in regulatory oversight. The BMA has recognised this and is transforming itself at two levels: regulatory and supervisory.
At the regulatory level, we are tailoring our toolbox to the reality of how digital financial services via Distributed Ledger Technology, AI and other emerging technologies are opening up the market to new entrants, creating a global reach through online platforms and democratising financial services. These concepts do not always fit into legacy framework. They require an innovation-enabling environment. This approach is most evident through our newer legislation, like the Digital Asset Business and Digital Asset Issuance Acts. However, we are not just creating more space for new sectors. We are also creating new space within which existing sectors may innovate. This started with our insurance sector with the creation of our sandbox and innovation hub to serve as innovation tracks for companies, as well as the creation of new insurance (non-sandbox) classes. We understood that our insurance market’s unique combination of wholesale, commercial reinsurance, captives and alternative capital would drive a similar uniqueness in the InsurTech solutions created. This has been the case—while other markets’ InsurTech innovation has mainly centred on improving customer experience and processes in the retail insurance market, the bulk of what we have seen in Bermuda is insurers improving transaction processing through better data exchanges, lowering data degradation and pushing for further integration of a seamless end-to-end experience for all market participants in the insurance cycle. The expectation is that with the use of technology, companies can achieve improved underwriting risk aggregation and management. We are already seeing this in the cyber underwriting space, with such tools leading to improved loss ratios. Further, we are seeing more convergence between insurance and other financial sectors through technologies such as blockchain. All of these trends require a totally different approach to regulation and supervision, which is why the BMA is actively enhancing its current framework to prepare for the future, all the while maintaining our position as a credible international financial centre.
From the supervisory perspective, we are re-engineering our supervisory processes with a digital- first mind-set. Our DS&AI Team are pioneering this, changing how we collect, treat and analyse. Simultaneously, we are transforming internally through the development of RegTech and SupTech tools so that industry can realise additional efficiencies when interacting with us. One tool currently under consideration and development is a new concept with respect to exchange of information, where firms will be able to provide data and documents in a secure environment as we interact with them on a real-time basis. An advantage of this is speed to market by decreasing the application processing and response time.
In short, innovation has always driven Bermuda’s financial services sector. The BMA’s role throughout has been to foster this with pragmatic and progressive regulation—regulation that stays abreast of emerging trends and adapts where necessary to ensure our framework adds value to the industry and, most importantly, customer protection.
What are the growth opportunities associated with cyber risks for today’s insurers?
Cyber insurance is still a relatively small line, in terms of the percentage of cyber premiums compared to the insurers’ overall portfolio. In Bermuda, however, we are seeing a mixed approach – although there is a trend towards this being a growth area. Some registrants appear to be planning to grow cyber insurance in response to rate increases, which in some instances grew between 25 to 100 percent. Other firms are exiting or at least reducing their exposures as cybercrime risks and costs continue to rise. In general, though, Bermuda has seen an increase in gross and net cyber premiums, driven by an increase in policies being written. Reinsurance continues to comprise the highest premiums on both a gross and net basis, which showcases reinsurers’ increasing appetite for cyber risk business. As we have explored this further through insurers’ annual filings, and shared in our annual Cyber Underwriting report, more insurers are steadily increasing line sizes, as they simultaneously innovate on coverage structure.
Commercial insurers, through reinsurance premiums written, make up a large portion of total cyber premiums written. However, we are also seeing an increase in captive players as insurers around the world continue exploring how their captives can best be positioned as a risk management tool. There are a few other indicators that Bermuda’s insurance industry is pursuing cyber risk as a growth opportunity. The first is the cyber risk measures they are introducing, including restricted terms around their coverage, pricing adjustments, partnerships with tech firms to ensure client education regarding cyber risk prevention and incident recovery, and purchasing higher levels of reinsurance. Firms are also prioritising cyber experience in their board rooms.
As our market’s approach to cyber risk develops, the BMA is developing its framework from both an underwriting perspective as well as the insurer’s own cyber resilience. For affirmative covers, we expect companies to have the appropriate governance mechanism to price their cyber offerings and have the adequate capital to support their risk taking. In addition, from a reporting perspective we expect insurers to articulate in their regular filings how they identify, measure, quantify, monitor and mitigate non-affirmative cyber risk exposures—or silent cyber. We also expect insurers to establish appropriate risk management practices for tail risk. Finally, from an operational perspective we expect companies to implement robust systems controls that address their own cyber risk exposures. Regarding this, we published the Insurance Operational Cyber Risk Management Code of Conduct to ensure that registrants introduce controls that are proportional to the nature, scale and complexity of their organisation. This was effective from 1 January 2021 and registrants are required to comply by 31 December 2021.
What would be your final message for our readers of Newsweek?
As 2020 taught us and, for that matter, any major global event has always taught, predicting the future is a fool’s errand. But we can pinpoint indicators and prepare for their likely eventualities.
The financial services landscape in Bermuda is rapidly growing, and the BMA is growing with it—just as we always have—in a stable and collaborative manner. A manner that is dictated by comprehensive yet pragmatic regulation, which protects consumers, the financial stability of our nation, our registrants and their investors. This is the spirit in which the BMA will continue to operate—a spirit tightly bound to innovation and problem solving, yet backed by a strong reputation and track record.
While this year and the coming ones are no different in terms of our responsibilities, we are continuing to identify the best way to fulfil these responsibilities—the best innovations, the best technologies, the best human capital and the most strategic way to re-engineer and harmonise these differentiating vehicles.