Bermuda regulator looks for greater clarity on ILS underwriting

The Bermuda Monetary Authority (BMA), the financial regulator on the island, is requesting a more granular level of detail on activities involving alternative reinsurance capital and insurance-linked securities (ILS) underwriting, seeking detail on any re/insurance business financed by directly capitalised mechanisms.

The BMA has published what it calls its “Alternative Capital Schedule” which will be applicable to all re/insurers operating alternative capital vehicles or structures.

The regulator explains what it means by alternative capital vehicles and structures as follows:

“Insurers that conduct business that is financed by a mechanism other than shareholders’ capital of the (re)insurance company. This may take various forms such as catastrophe (cat) bonds, industry loss warrants, sidecars, collateralised reinsurers, longevity and mortality bond/swaps, hybrid securities such as preference shares, swaps, and contingent capital such as letters of credit, among others.”

The BMA is asking for this data in relation to the 2017 underwriting year to begin with, hoping to gain a greater clarity of how alternative capital and ILS vehicles are used within the islands insurance and reinsurance market.

The regulator expects that the Alternative Capital Schedule will help it to maintain “a prudent supervisory regime for this rapidly growing sector.”

The insights gleaned from this data call will also be used to produce aggregate statistics for publication as well, which could provide an interesting look into how alternative capital vehicles are being used by traditional companies in particular.

The BMA said that by collecting and then publishing this information, it “promotes transparency and further enhances the Authority’s and Bermuda’s credibility with key stakeholders.”

Included in the data that the BMA is requesting are details on the types of reinsurance and retrocession contracts underwritten by alternative capital vehicles and structures, lines of business included, geography of coverage, aggregate exposures assumed, terms of coverage, premiums earned, losses on the contracts, amounts of buffer collateral held and the types of collateral used.

This data will provide the regulator with much greater clarity on how alternative capital and ILS structures are being used by the insurance and reinsurance market and with Bermuda the home to the majority of ILS vehicles the output from this data-call could be fascinating.

The 2017 underwriting year data will be particularly interesting given the lack of transparency as to just how large the losses faced by ILS and collateralised reinsurers from the hurricanes and wildfires actually was.

The additional disclosure requested by the BMA may also be a positive for the entire ILS market, as numerous institutional investors ask questions on precisely the types of aggregate data the alternative capital schedule may collate. The BMA’s efforts could provide a useful source of qualitative data on the health of the ILS market at each year-end.