BMA to prioritise substance of parametric risk transfer over contractual form for new PSPI

The Bermuda Monetary Authority has confirmed that contracts under its proposed Parametric Special Purpose Insurer (PSPI) regulatory framework can be structured as reinsurance, derivatives, or swaps, so as long as the underlying risk transfer meets the applicable statutory and regulatory requirements.

Back in January, the BMA launched its awaited consultation process that proposed a dedicated regulatory framework for a new Parametric Special Purpose Insurance (PSPI) class of company (a Parametric Special Purpose Insurer).

As we reported at the time, the BMA explained that the Parametric Special Purpose Insurer (PSPI) class of company is “designed to support Bermuda alternative capital (re)insurers that plan to adopt parametric business models.”

Now, nine months after launching its PSPI consultation, the BMA has published a stakeholder letter, addressing the key themes and questions raised in the submission, setting out the Authority’s intentions for developing a final, “fit-for-purpose framework.”

The BMA explained in the letter that it has carefully reviewed the feedback and proposals made by respondents regarding the dedicated regulatory framework.

“Respondents primarily sought clarity on continuity for existing parametric business, the scope and classification of the proposed PSPI regime, eligible participants, collateral requirements, third-party validation expectations, and the transaction approval process. The Authority’s responses below address those themes in turn and identify where further guidance will be developed,” the letter said.

One of the key themes addressed was where stakeholders asked for clarification regarding the Authority’s intention for the PSPI to be available only for traditional parametric business, and whether the Authority intends to allow only business that would be transacted under a re/insurance contract?

In response, the BMA said: “The PSPI regime is intended to support structured, fully collateralised parametric risk transfer. The Authority will prioritise the substance of the risk transfer over the contractual form. This may include contracts structured as reinsurance, derivatives, or swaps, provided they meet the applicable statutory and regulatory requirements.”

The BMA continued: “The PSPI framework is distinct from the Innovative Insurer General Business (IIGB) regime. The IIGB class remains the appropriate vehicle for insurers conducting business subject to the Digital Asset Business Act. By contrast, all parametric contracts written by a PSPI must demonstrate insurance risk transfer characteristics and be supported by appropriate governance arrangements, transparent triggers, and collateralisation arrangements.”

In addition, respondents also sought clarification on whether parametric risks could continue to be transacted under existing insurance classes, and if insurers writing this business would need to obtain a separate license under the new framework

In response, the BMA confirmed that the proposed PSPI class is intended to provide a specialised framework that complements the existing insurance classes.

“The proposed framework is not intended to disrupt existing operations. Insurers currently writing parametric risk under other licence classes may continue to do so without any requirement to re-license or re-domicile that business into a PSPI,” the BMA explained.

Furthermore, the BMA clarified its position on existing Special Purpose Insurers (SPIs) looking to transition to the PSPI, and whether any first-year fee waiver would apply in such cases.

“The Authority will consider applications from existing Special Purpose Insurers (SPIs) seeking to reclassify as PSPIs. The Authority is also considering whether any introductory fee waivers for new PSPIs may apply to such reclassifications. The Authority also notes the interest from SPIs seeking to transact both indemnity and parametric business. Such arrangements may be permitted on a case-by-case basis, taking into account the nature, scale and complexity of the proposed activities. Applicants will be required to demonstrate that their prudential, operational and governance frameworks are adequate to manage both lines of business,” the BMA said.

The BMA said that it will continue reviewing the feedback it receives from the consultation as it continues to develop a final PSPI framework.

Lastly, the BMA also confirmed that it is currently drafting an amendment to the Insurance Act 1978 to implement the PSPI class in Q4 2026 and intends to publish comprehensive guidance at that time to help stakeholders navigate and understand the final requirements.