Bermuda's insurance and reinsurance market insights

Approximately three and a half percent of the reserves of the global life insurance sector are held in Bermuda and and that's a significant footprint but what really makes Bermuda stand out is its robust regulatory framework combined with its political stability and also the depth of actual and financial expertise. It's a place where innovation meets discipline. You're listening to Rethinking Insurance, a podcast series from WTW where we discuss the issues facing P&C, life, and composite insurers around the globe as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance. Welcome to our podcast Rethinking Insurance, the Bermuda edition. I'm Rick Ayes and I'll be interviewing three of my colleagues, Martin LaFrancoise, Cédric Thibault, and Nick Camissaroff. We will discuss Bermuda's actuarial expertise, technological advancements, and regulatory updates in the insurance and reinsurance sectors. Welcome Martin. Thanks Rick. Always a pleasure. And Cédric. Thanks for having me Nick. And Nick. Glad to be here Rick. Looking forward to this discussion. So we will discuss Bermuda's actuarial expertise, technological advancements, and regulatory updates in the insurance and reinsurance sectors. But before we start, I will introduce the speakers a little bit more. So first off, Martin LaFrancoise is a qualified actuary, director at WTW, and has been actively involved in Bermuda's insurance sector for almost 10 years now. With a strong background in risk management and reinsurance, Martin brings valuable insights to our discussion. Cédric Thibault is a qualified actuary based in Bermuda with over 20 years of experience in both life and annuities, insurance and reinsurance. His profound knowledge in model risk management, IFRS 17 transformation, and financial reporting. Nick Camissaroff is an actuary with extensive experience in reinsurance and insurance. He has contributed significantly to the development of innovative insurance products and regulatory compliance strategies. So now to kick us off. I'll start off with a high-level question. So Martin, Bermuda's often described as a global hub for reinsurance. What's driving that reputation? So Bermuda is a common domicile for reinsurance. In fact, it's well known as the world's risk capital. And to put things in perspective and numbers, as of year end 2023, approximately 3.5% of the reserves of the global life insurance sector are held in Bermuda. And that's a significant footprint. But what really makes Bermuda stand out is its robust regulatory framework, combined with its political stability and also the depth of actual and financial expertise. It's a place where innovation meets discipline. And to build on that, Bermuda is also instrumental in closing the global protection gap. Reinsurance here help the primary insurers or seedings manage capital more efficiently, which in turn supports onshore product innovation and broader coverages to policyholders. Yeah, and Nick, before we go any further, I think it's important for the benefit of the audience to understand the benefit of reinsurance to the insurance market and how Bermuda plays a role in this reinsurance ecosystem. So reinsurance serves the insurance market by helping close the global protection gap, which according to several sources account for trillions of dollars. It allows seedings to transfer risk to reinsurer, for example, which in turn allows direct insurers to sell more new business. It allows the insurance company to be more comfortable in selling new products for a number of reasons. One of which is that the direct insurer can benefit from having the reinsurer access to expertise, underwriting expertise, for example, and so they can price and design their insurance products with their partner. So Bermuda plays a key role in this ecosystem. All right, thank you both. So now let's talk about the regulatory side. So the Bermuda economic balance sheet, how does that differ from traditional accounting? The Bermuda economic balance sheet, or EBS, uses a market consistent valuation approach. It includes a technical provision which compromises the Bell and a risk margin. The Bell accounts for the expected future liabilities, while the risk margin adds a buffer for uncertainty for liability cash flows. This approach enends transparency and risk sensitivity compared to the traditional gap or statutory accounting. To calculate the best estimate liability, an insurer can either use the standard approach or the scenario based approach in the Bermuda regime. Thanks for that. So Martin, can you explain the scenario based approach for calculating the Bell? This is a valuation methodology. The scenario based approach allows insurers to use their actual asset portfolios and reinvestment strategies. The model earn rates under several prescribed interest rate scenarios. And the most punitive of those scenarios resulting in the highest Bell is the one binding. And this method essentially provides a more tailored and realistic view of liability valuation, especially for products that are long in duration or that are complex. SB offers a more dynamic and responsive approach that incentivizes robust risk management, including asset liability management. All right. And for those that are unfamiliar, Bermuda recently updated its required capital requirements known as the Bermuda Solvency Capital Requirement or BSCR. So what are some of the changes introduced in 2024 BSCR updates? So BSCR is Bermuda's required capital calculation. It consists of these major components, market risk, long-term insurance risk, operational risk. The 2024 amendments updated the long-term insurance risk component. They introduced the lapse risk and the expense risk into the framework. These are phased in over 10 years for existing reinsurers. Lapse risk captures adverse policyholder behavior, while expense risk addresses the risk of inflation and the rising administrative costs. Both are recalculated under stress scenarios and are expected to significantly impact products with high optionality or administrative overhead. Yeah, Nick, I would add that these changes are designed to enhance the robustness of the BSCR framework to ensure that insurers are better prepared for a range of potential risks as well. So going back to lapse risk, how is it calculated and why is it so important? Lapse risk, Nick and Rick, which is embedded into the best estimate liability valuation, is assessed using three scenarios. Lapse up, lapse down, and mass lapse. Each recalculates the best estimate liability and the most punitive result is the one binding. This lapse risk is crucial for products where surrender values exceed asset values or where policyholder behavior can significantly affect cash flows. And so what then is the lapse cost and how does that affect SBA users? I'll take this one. So the lapse cost is a new component that's added to SBA Bell. It's derived from lapse risk and the historical experience that companies would have reflecting the cost of disintermediation. This ensures that the reinsurers account for the financial impact of policyholder behavior under stress conditions. So now what are the recent asset related regulatory updates in Bermuda? Rick, there are several that are, let's say, effective year in 2024. And of those updates, the one that stand out are the prescribed default and downgrade floors, the mandatory modeling of transaction costs and asset sales. There's also explicit modeling of derivatives and BMA approval for certain asset classes, like, for example, structured securities or private assets. And all of these changes, they aim to enhance the realism of asset modeling under the SBA. Yeah, and really, these updates are designed to introduce prudent modeling on the asset side of the balance sheet. These updates provide a more accurate view of an insurer's financial position. All right, so shifting gears a little, can any of you tell me more about the prudent person principle and why it's significant? Yes, sure. The prudent person principle is the principle that mandates that insurers manage policyholder funds with care, prioritizing capital preservation and risk transparency. It restricts speculative views of derivatives, requires liquidity stress testing for complex assets and enforced accountability for outsourced investment functions. It aligns Bermuda with global best practices in fiduciary responsibility. And also, Rick, it's a very important component of Bermuda's regulatory framework to make sure that the insurers and re-insurers act in the best interests of policyholders. Understood. So has the BMA strengthened governance requirements for the SBA? Yeah, the BMA now requires a comprehensive SBA model documentation, validation of data inputs, as well as full model risk management policy framework covering the model lifecycle. And all of these measures are there to ensure that the models used in regulatory reporting are robust, transparent, and importantly, well-governed. So what are the new public disclosure requirements proposed for year-end 2025? So there is a bunch of them. So insurers and re-insurers have to disclose their asset holdings at a granular level, similar to U.S. Blue Book, liabilities by product, including gross and net reserves, as well as year-by-over-year changes for these reserves. The insurers also have to disclose ALM strategies, including the stress testing that is done and the justification. These disclosures aim to enhance transparency and market discipline. And is the great financial crisis or GFC stress test part of that requirement? Due in June, this stress test mimics the 2008 crisis with prescribed shocks to fixed income, equity, and real estate assets plus good defaults. It assesses whether Bermuda insurance sector poses systematic risk for the global financial system and test the resilience of insurers under extreme conditions. Really a critical tool for assessing the resilience of insurance sector, ensuring that it can withhold severe financial shocks like the 2008 great financial crisis. And how do you think these regulatory changes affect Bermuda's competitiveness? While these changes may impose some short-term compliance burdens and some additional costs, these updates really enhance Bermuda's credibility, transparency, and alignment with international standards. These changes strengthen Bermuda's position as a trusted, well-regulated domicile for global insurers and reinsurers. I would say, Rick and Nick, it's a strategic move that ensures Bermuda remains credible in the global market. Okay. And on that note, so how does Bermuda's regulatory framework compare internationally? Well, it's well known that Bermuda's framework is solvency to equivalent for commercial insurers, as well as recognized by the NAIC as a reciprocal jurisdiction. It focuses on many quantitative and qualitative requirements, such as risk-based capital requirements, market consistent valuation, and governance standards. It is among the top regulatory regimes globally. Okay. And from what you can gather, what role does the Bermuda monetary authority or the BMA play in shape in the market? So the BMA is a proactive regulator. It issues consultation papers, engages the industry and industry groups in getting feedback, and it's continuously updating the framework to reflect the emerging risks and changes to global standards. So these recent changes really emphasize efficiency, transparency, and policyholder protection. All right. Now my final question and circling back to all the information you've provided this far. So what should insurers and reinsurers do to prepare for these changes? To prepare for these changes, firms should enhance their modeling and governance frameworks, review asset portfolios for compliance with the new SBA and prudent person rules, prepare for expended disclosures, conduct internal stress testing aligned to ensure compliance or ownership of the risk ecosystem. Proactive adaptation will ensure compliance and strategic advantage in the evolving Bermuda market. That's for sure. So thank you all for joining on this insightful discussion about Bermuda's insurance and reinsurance market. Thank you, Martin. Thanks Rick. It was a pleasure to be here. Great. And thank you, Nick. Thank you, Rick. It was awesome. And thank you, Cedric. Thank you so much Rick. Hoping to have the chance to all see you in Bermuda very soon. Yeah, it'd be great to get down there. So stay tuned for more episodes where we delve into the latest trends and developments in the industry. Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights section of www.co.com. This podcast is for general discussion and/or information only, is not intended to be relied upon. An action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.