BMA: new approach required for asset-intensive insurance
The growth of asset-intensive insurance business calls for a more tailored and agile supervisory and regulatory approach, the Bermuda Monetary Authority has said.
The island’s financial services regulator has published a White Paper surveying the risks posed by the growth of asset-intensive insurance business as well as existing and proposed practices to ensure that the sector is appropriately regulated.
The 24-page document titled The Evolution of Asset-Intensive Insurance updates a previous paper, released in December 2023 — Supervision and Regulation of Private Equity Insurers in Bermuda.
The BMA wrote: “Strategic alliances between life and annuity insurers and asset management firms have played a significant role in narrowing the global protection gap, including in asset-intensive businesses.
“However, these partnerships have led to a notable shift in traditional investment strategies and pose unique risks and supervisory challenges, including potential governance and conflicts and a tendency to invest in higher proportions of illiquid assets.
“The interplay between these two risk drivers poses challenges to traditional supervisory approaches. The BMA’s supervisory experience has shown that a more tailored and agile supervisory and regulatory approach that takes into account the specific characteristics and circumstances of the insurer is needed.”
It added: “For example, to gain a comprehensive understanding of the risk profile [including liquidity risk], a range of tools are needed.
“These include more frequent and detailed on-site inspections, off-site reviews, data requests, interviews with key functions and persons, closer engagement regarding material transactions and bespoke stress tests and associated recovery plans.
“Enhanced cross-border supervisory co-operation is also needed. Additional customised regulatory reporting is also needed to help closely monitor and address liquidity risks.
“This includes identifying liquidity risk indicators, such as assets that are paid in kind, poor ALM [asset liability management] and maturity transformations, leverage, investment commitments, insurance product design and distribution channels, etc.”
The BMA also called for further regulatory enhancements by cedant regulators.
The organisation wrote: “The BMA sees an opportunity for regulators in other jurisdictions to evaluate and, if necessary, improve their current supervisory tools and expectations for insurers.
“This is necessary to ensure that these tools effectively capture and mitigate risks that are specific to the asset-intensive nature of the insurance business and its activities in the insurer’s respective markets.
“While some of these efforts are still under development, the BMA supports initiatives by cedent regulators that require ceding entities to demonstrate to their regulators that they have proportionate but adequate risk management to identify, measure, monitor, manage, and report the risks to which they are exposed in relation to their asset-intensive reinsurance arrangements.”
The BMA added: “Regulatory co-operation and collaboration between cedent and reinsurer regulators are essential for the effective supervision of asset-intensive insurance businesses.
“This includes joint evaluation of the deals to identify risks and agree on mitigants; supervisory colleges and bilateral engagements; and joint onsite work focusing on key areas such as collateral arrangements.”
• For the full report, see Related Media
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