Instituted at the beginning of the year, new reporting requirements for Bermuda commercial insurers registered as Class 3A, Class 3B, Class 4, Class C, Class D or Class E (Insurers) under the Insurance Act 1978 (Act), improve the visibility of the financial position of the Insurers.
This article introduces the new requirements applicable to the statutory financial statements. In particular, it highlights certain substantial changes affecting the Insurers registered under the Segregated Account Companies Act 2000 (SAC Insurers).
Pursuant to these regulatory changes Insurers are required to prepare financial statements under section 17A of the Act. These financial statements will be used as the basis on which statutory financial statements will be prepared under the new Insurance Account Rules 2016 (2016 Rules). The statutory financial statements will have to comprise statements both on unconsolidated and consolidated bases.
Pursuant to this new regulatory framework, Insurers are required to prepare unconsolidated statutory financial statements and income statements on a GAAP basis (adjusted by certain prudential filters and reserves), which are then used to produce the following documents:
• Statutory balance sheet.
• Statutory income statement.
• Statutory statement of capital and surplus.
The information contained in the unconsolidated statutory financial statements will be used to determine the insurer’s:
• Minimum solvency margin, being 25 per cent of an Insurer’s Enhanced Capital Requirement (ECR) as determined from the Economic Balance Sheet (EBS).
• Liquidity ratio (if applicable).
• Class of registration.
For insurers with subsidiaries consolidated in their GAAP financial statements, the Bermuda Monetary Authority (BMA) must be provided with the necessary information on an unconsolidated basis to assess the Insurers’ liquidity position, minimum solvency margin and insurer class without migration of the subsidiaries’ financials.
The new regulatory framework also requires Insurers to provide consolidated statutory financial statements which constitute the basis for the preparation of their EBS to reflect the consolidated GAAP financial statements values, subject to certain prudential filters and EBS valuation rules that are consistent with the EBS framework. The EBS is the basis for the calculation of the applicable ECR.
Insurers should use their existing GAAP balance sheet as a starting point to establish their EBS, which is produced on a consolidated basis using a model adopted by the Insurer and agreed with the BMA.
Insurers are required to consolidate their holdings of affiliates to prepare their EBS. In this case, equity interests in controlled affiliates are consolidated using the GAAP consolidation model. Further, Insurers should follow methods proportionate to the nature and complexity of the risks underlying their insurance liability. Where the Insurer does not hold a majority equity interest in affiliates, but has the ability to exercise significant sway, such asset will be valued using the equity method. Where Insurers have no control or influence, such asset will be valued at market price.
Class 3A, Class C and Class D insurers, may choose to provide condensed consolidated GAAP financial statements by producing abbreviated notes to their financial statements. This will help such insurers to reduce the costs of the Section 17A requirements (particularly if they do not currently prepare GAAP financials). The format and rules for providing the condensed consolidated GAAP financial statements are set forth in Schedule VIII and Schedule IX of the 2016 Rules.
The key features with respect to the prudential filters provided under the 2016 Rules used for both unconsolidated statutory financial statements and consolidated statutory financial statements are that they:
• Eliminate non-admitted assets (including goodwill and other assets not considered admissible for solvency purposes); and
• Include certain assets and liabilities that are generally off-balance sheet (such as guarantees and other instruments that do not relate to the insurer’s insurance business).
The use of unconsolidated and consolidated account methodology bears significant changes in evaluating the assets and liabilities of SAC Insurers. Under the EBS framework, the unconsolidated statutory financial statements and consolidated statutory financial statements for SAC Insurers shall be organised with the assets and liabilities in the segregated accounts and the general account being viewed as one, which requires SAC Insurers to aggregate their segregated accounts and general account balances.
The main consequences for SAC Insurers are:
• Their license class will be determined based on the aggregated general account and segregated accounts net premiums or total assets; and
• Their minimum solvency margin will be calculated using the aggregated general account and segregated accounts’ assets.
However, SAC Insurers can apply to the BMA for an exemption from aggregating the segregated accounts and general account balances in cases where such SAC Insurers can demonstrate that there is appropriate ring fencing between their segregated accounts.
These changes in the reporting work flow for Insurers further strengthen Bermuda’s position in the international insurance market.
Lawyer Nicolas Champ is an Associate and a member of the Insurance and Reinsurance Team within the Corporate Department at Appleby. A copy of this column is available on the firm’s web site at www.applebyglobal.com
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer