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BMA: Stress tests of insurers to become regular feature in future

Shelby Weldon at RIMS

Stress testing of Bermuda's insurance companies is likely to become a regular feature of regulation on the Island - even after the global economy has recovered from its present plight.

Shelby Weldon, director of insurance licensing and authorisation at financial regulator the Bermuda Monetary Authority (BMA), said that while the Island's insurers had weathered the storm of the global financial crisis pretty successfully, continued stress testing would help firms detect potential problems in future.

Mr. Weldon was speaking at the RIMS Conference in Orlando, where he has been stationed at the Bermuda booth, fielding questions on regulation and the licensing of new companies from dozens of delegates.

Early in the financial crisis, the BMA stress-tested companies for their exposure to US sub-prime mortgages.

Late last year, the regulator announced it had extended the tests to investment portfolios and underwriting exposures.

Companies were shown how their test results compared to those of competitors, thereby illustrating any weaknesses they might have and giving them a chance to adjust their exposures.

Financial guarantors had suffered from sub-prime exposure, while some major commercial insurers saw asset devaluation leading to "losses akin to a major hurricane event", Mr. Weldon said.

"For the most part, the Bermuda market has been pretty resilient compared to other parts of the financial services industry," Mr. Weldon said.

"We will continue to be proactive in monitoring our companies - not only when we have market dislocations, but as a regular part of our supervisory approach.

"We want to prepare companies well in advance for other eventualities and to be able to make recommendations. I believe that stress testing will become a regular aspect of our day-to-day operations."

Mr. Weldon's department has undergone major changes over the past year with the introduction of a new classification system for insurers, which differentiates more clearly between captive and commercial insurers.

The move included reclassification of existing Class 3 companies, a process completed by the end of March, as planned. Simultaneously, the BMA has also implemented a new class of 'Special Purpose Insurer' (SPI) that could foment growth in the Bermuda market, according to Mr. Weldon.

"The changes have allowed us to segregate our regulation of what are truly captives and what belongs in the commercial insurer space," Mr. Weldon said. "Clearly commercial insurers should be regulated to a higher level than the captive market."

In some cases, there had been a difference of opinion between regulator and insurer over which category was appropriate, but the issues had been resolved amicably, Mr. Weldon said.

Incorporations of new insurance companies fell dramatically last year, in Bermuda and elsewhere, as the credit crunch made capital very hard to come by. The BMA processed 40 incorporations in 2008 and the 12 in the first quarter of this year indicate little improvement.

"I still see great interest in our jurisdiction in the requests I get for information," Mr Weldon said, adding that he didn't anticipate any significant turnaround in the near future. However, he believes the new SPI category could see be one of the areas to see most activity as economic conditions improve.

"We see great opportunity for growth in this sector of the insurance market," Mr. Weldon said. "It is an area that has attracted great interest and, without the crisis, that interest would probably have been much greater."

Catastrophe bonds, sidecars and other entities founded to insure for a single and specific purpose, are among the type of special purpose vehicles that fit into the SPI category. The new legislation makes it cheaper for such entities to be established and updates regulation to keep up with such innovative approaches.

One positive spin-off for the BMA from the crisis is the emergence of insurance industry veterans on the job market.

"For us, this is the best recruiting environment we have ever seen," Mr. Weldon said. "We have been able to hire experienced people from the industry and that will serve us well. That kind of expertise can only make us a better regulator."