bermuda: assessment of financial sector … assessment of financial sector supervision and...
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© 2008 International Monetary Fund October 2008 IMF Country Report No. 08/336
Bermuda: Assessment of Financial Sector Supervision and Regulation
This Assessment of Financial Sector Supervision and Regulation for Bermuda was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on September 8, 2008. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Bermuda or the Executive Board of the IMF. The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.
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International Monetary Fund
Washington, D.C.
INTERNATIONAL MONETARY FUND
BERMUDA
ASSESSMENT OF FINANCIAL SECTOR SUPERVISION AND REGULATION
Prepared by the Monetary and Capital Markets Department
Approved by Jan Brockmeijer
September 8, 2008
This report is based mainly on information obtained during missions from June 12 to 22, and May 7 to 23, 2007 (for the AML/CFT evaluation), stress testing based on end-2006 company data, and consultations with the authorities between September 2007 and May 2008. The assessment team members comprised Ms. Mary G. Zephirin (Mission Chief), Messrs. Jorge Chan-Lau (Senior Economist) (both IMF), and Marcel Maes (consultant, banking supervision); and for the review of the insurance sector, Ms. Su Hoong Chang (consultant), Mr. Henning Göbel (consultant, German Federal Financial Supervisory Authority, BaFin), and Mr. Ray Spudeck (consultant, Florida Department of Insurance Supervision). The AML/CFT team comprised Messrs. Manuel Vasquez (Mission Chief), Antonio Hyman Bouchereau (both IMF), Ross Delston (consultant) and John Abbott (consultant).
Bermuda is a globally important reinsurance center and the second largest captive insurance domicile after the U.S. Appropriate oversight of its financial system therefore has significant cross-border benefits. The assessment found that, with the exception of the AML/CFT regime, recommendations of the earlier assessment had been implemented.
• Insurance supervision for the commercial insurers and reinsurers has a high level of observance of the IAIS Core Principles. Implementation of a risk-based regulatory framework is in place for the most systematically-important market segment. Full rollout to the industry is required for achievement of comprehensive market oversight.
• The Banking Supervision Department of the Bermuda Monetary Authority (BMA) has been restructured to support the introduction of a formal risk-based supervisory system. The regulatory framework has been substantially improved.
• Securities regulation has been updated with, in particular, 2006 legislation governing collective investment schemes and a dedicated inspection team. The BMA has also been given statutory oversight of clearing and settlements.
• The AML/CFT regime requires significant updating to keep pace with the FATF recommendations, and to implement the recommendations of the 2003 assessment.
This report was written by Mary G. Zephirin and Jorge Chan-Lau with contributions from other members of the assessment team.
The AFSSR is a summary report on implementation of the indicated financial sector regulatory standards. It has been developed to help jurisdictions identify and remedy weaknesses in financial sector supervision and regulation. The reviews do not directly assess risks such as those associated with asset quality, markets, or fraud that could affect the soundness of financial systems or individual institutions.
2 Contents Page
Glossary .................................................................................................................................... 3 Executive Summary.................................................................................................................. 4 I. Introduction ........................................................................................................................... 7 II. Political and Economic Background .................................................................................... 8 III. Financial System Overview ................................................................................................ 8
A. Banking ............................................................................................................................ 8 B. Securities Markets .......................................................................................................... 10 C. Insurance ........................................................................................................................ 11 D. Regulatory Framework, Oversight, and Market Integrity Arrangements...................... 16 E. Findings of Earlier Assessments .................................................................................... 18
IV. Strengths and Vulnerabilities in the Financial System..................................................... 18
A. Progress in the implementation of financial standards and follow-up on 2007/08 market disturbances......................................................................................................................... 18 B. Stress Test Results for Class 4 and Long-Term Issuers ................................................. 22 C. Cross-border Cooperation and Information Exchange................................................... 22 D. Preventive Measures: Designated Non-Financial Businesses and Professions (DNFBP)37 E. Other Issues .................................................................................................................... 39
Tables 1. Key Recommendations ..........................................................................................................6 2. Bermuda Financial Sector......................................................................................................9 3. Bermuda: Insurance Sector ..................................................................................................14 4: Analysis of Gross Written Premiums in 2006 .....................................................................15 5. Summary of Observance of the Insurance Core Principles—ROSC...................................27 6. Summary Table of Observance and Key Recommendations ..............................................40
Boxes 1. Capital Flows in the Reinsurance Sector. ............................................................................12
Annexes I. Report on the Observance of Standards and Codes (ROSC) for the IAIS Insurance Core Principles..................................................................................................................................24 II: ROSC for the FATF’s Recommendations for AML/CFT ..................................................34 III: Actions and Responses to the Recommendations of the 2003 Assessments.....................50 IV. Authorities’ Responses to Key Recommendations............................................................65
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GLOSSARY
AGC attorney-general's chambers AML anti-money laundering ATFA The Anti-Terrorism (Financial and Other Measures) Act 2004 ART alternative risk transfer Authority Bermuda Monetary Authority BDCA Banks & Deposit Companies Act 1999 BMA Bermuda Monetary Authority BMAA Bermuda Monetary Authority Act 1969 BSX Bermuda Stock Exchange CDD customer due diligence CIS collective investment scheme(s) CFT combating the financing of terrorism CP core principle(s) CSP companies and trusts service providers DAR detailed assessment report DPP Director of Public Prosecutions FATF Financial Action Task Force FIA Financial Intelligence Agency FIU financial intelligence unit FT financing of terrorism GWP gross written premium IA Insurance Act 1978 IAC Insurance Advisory Committee IAIS International Association of Insurance Supervisors ICP Insurance Core Principles ID Insurance Department IBA Investment Business Act 1998 IBA/03 Investment Business Act 2003 IFA Investment Funds Act IOSCO International Organization of Securities Commissions ML money laundering MLRO money laundering reporting officer MOF Minister of Finance MOU memorandum of understanding NAMLC National Anti-Money Laundering Committee POCA Proceeds of Crime Act 1997 PCMLR Proceeds of Crime (Money Laundering) Regulations 1998 NCCT non-cooperative countries and territories ROSC Report on Observance of Standards and Codes SAR suspicious activity report SFT Suppression of the Financing of Terrorism SRO self-regulatory organization SR special recommendation TSB trust service business
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EXECUTIVE SUMMARY Bermuda is the third largest reinsurance center after London and New York, and the second largest captive insurance domicile after the U.S. Appropriate oversight of its financial system therefore has significant cross-border benefits. Bermuda’s financial sector supervision was first assessed by the IMF in 2003 (see http://www.imf.org/external/np/ofca/ofca.asp). Since that assessment, the Bermudian authorities have made impressive progress in developing and implementing a risk-focused approach to supervision across the range of their sectoral supervisory responsibilities. At the time of the assessment missions, recommendations of the 2003 assessment had been taken into account or implemented in all areas but anti-money laundering and combating the financing of terrorism (AML/CFT). Supervision of the insurance industry, especially of the large commercial companies, has been significantly strengthened. Insurance supervision for the commercial insurers and reinsurers has a high level of observance of the IAIS Core Principles. The decision to restructure the supervisory system on the basis of a risk-based framework enhanced the system beyond the 2003 recommendations that aimed at improving the previous largely self-supervised system. The current Bermudian insurance regulatory system is, in contrast, based on hands-on risk-sensitive supervision. Insurers are ranked by risk likelihood and impact, with riskier categorizations attracting increased supervisory attention. The risk-based framework is largely established, its implementation is in train and in place for Class 4 companies, the most systemically important market segment. See section III.C for the description of insurance company classes.
Full rollout of the risk-based regulatory system to all market segments is, however, required for achievement of comprehensive oversight of the market. Effective, comprehensive implementation of the risk-based regulatory system requires continuous review of regulatory resources, preservation of regulatory independence, high levels of disclosure, and the granular risk-rating and supervision of the companies in the Class 3 group.
Banking supervision has progressed both organizationally and in supervisory practices. To support the introduction of a formal risk-based supervisory system, the banking department has been restructured. Supervisory programs are tailored to entities with the highest risk scores identified through standardized analysis. The regulatory framework has also been substantially improved.
Both insurance and banking supervisors are monitoring firms affected by sub prime exposures. Unsurprisingly, some insurance companies have been adversely impacted. However, the authorities have taken a proactive stance in assessing both the risks and the companies’ risk management. Such exposure is not anticipated to be a systemic threat.
Securities regulation has been updated in line with the 2003 recommendations. In particular, a new Investment Funds Act (IFA), that provides additional rules for collective
5
investment schemes, was passed in 2006 and a dedicated inspection team was formed. The BMA has been given statutory oversight of clearing and settlement systems.
The AML/CFT regime requires significant updating to keep pace with the Financial Action Task Force (FATF) recommendations, implement the recommendations of the 2003 assessment, and to implement a risk-sensitive approach to preventative measures for financial institutions.
To maintain the momentum of execution, the BMA must continue to build staff resources, and to promote and enhance their experience and expertise. This and other key recommendations are indicated in Table 1.
The authorities are implementing most of these recommendations. Staff resources continue to increase in both quantity and depth, with larger supervisory teams for all sectors, a separate risk and policy unit, an actuarial unit, and a dedicated insurance run-off team, as well as a program of specialist training for staff. In response to the insurance assessment recommendation that it keep its relationship with industry under review, the BMA is publishing a statement of policy on its approach to consultation with industry. The rollout of the risk-based supervisory program has continued with Class 4 companies filing results of the risk based capital model and enhanced disclosures at end-2007. In July 2008, legislation subdividing the Class 3 group was passed, facilitating their coverage by the risk-based framework and capital model. The BMA’s 2008–09 Business Plan also signals its plan to introduce insurance group supervision by 2011. Transparency has been enhanced by legislation requiring that Class 4 publish their GAAP accounts, and other measures are under review. Updated AML/CFT legislation was enacted in 2007 and additional primary and secondary legislation is in process.
6
Table 1. Key Recommendations
Bermuda Monetary Authority
• The BMA has already made a considerable effort and progress in increasing skilled staff. However, to meet the standard it has set itself of becoming a leading regulator, the BMA must continue to work to attract and retain a range of skilled staff.
Insurance
• The BMA should periodically review its relationship with industry to preserve regulatory independence.
• Supervisors should proceed as planned to implement the full rollout of the new supervisory framework.
• Given the global systemic nature of the companies headquartered in Bermuda, the Insurance Department (ID) should formulate a pragmatic approach, and start closer cooperation with other authorities in order to implement group supervision.
• The BMA should enhance transparency of companies, including through implementation of the IAIS standard on disclosure.
• As part of the staffing mentioned above, the BMA will need specialized resources to validate the risk-management models of, and communicate effectively with, the companies.
Banking
• Legislation should be enacted to provide the BMA with more direct intervention tools in the case of a troubled bank.
AML/CFT
• Update legislation and regulations, and amend procedure and implementation as detailed in the AML/CFT Report on Observance of Standards and Codes (ROSC).
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I. INTRODUCTION
1. An update of the 2003 offshore financial center (OFC) Module 2 assessment of financial regulation and supervision in Bermuda was carried out in the periods May 7–23 and June 12–22, 2007 within the framework of the OFC Assessment Program approved by the Executive Board of the Fund in November, 2003. Consultations with the authorities continued between September 2007 and May 2008.
2. This report briefly describes the developments in the financial system and regulatory and supervisory arrangements in Bermuda since 2003; provides an update on how the relevant recommendations from the 2003 assessment have been implemented; and summarizes the results of the detailed assessments. Detailed assessments were carried out of the supervision of commercial insurers—on the basis of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles, and of the AML/CFT regime—on the basis of the AML/CFT methodology of 2004, as updated in June 2006, for assessing compliance with the Financial Action’s Task Force 40+9 Recommendations. ROSCs based on the detailed assessments of insurance supervision and the AML/CFT regime are annexed. The 2003 assessment of banking supervision was factually updated, taking account of the revised Basel Core Principles (BCP).
3. The 2003 assessment had found that supervision was well-developed in banking, key areas of securities regulation, and for AML/CFT (based on the then-current standard), but noted some deficiencies in insurance supervision.
4. Bermuda is both the third largest reinsurance center after London and New York, and the second largest captive insurance domicile after the U.S.1 The assessment update gave most attention to the insurance sector, focusing in particular on the systemically-important features of the Bermuda market. Commercial insurers are globally active and supervisory standards to cover them have been agreed by supervisors internationally. The detailed IAIS assessment covered the commercial sector, with stress testing of a sample of such companies to complement the assessment. However, exposure to captives is dominated by related parties, and there is as yet no agreement on the extent of oversight required in the captive insurance sector.2 To reflect this situation, a review of captive supervision was carried out. The extensive changes in the AML/CFT standard since 2003 dictated a detailed assessment of that regime.
1 Captive insurance is defined by the IAIS as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties”.
2 See IAIS, Issues Paper on the Regulation and Supervision of Captive Insurance Companies, October 2006.
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II. POLITICAL AND ECONOMIC BACKGROUND
5. Bermuda is a self-governing British Overseas Territory. The governor, appointed by and representing the British monarch, has responsibility for external affairs, defense, internal security, and the police. The legislature has two chambers—the upper house of 11 appointed members and a 36-member house of assembly elected for a 5-year term. The last elections were held in 2003. Bermuda’s legal system is based on English common law, the doctrines of equity, and Bermuda statute law dating from 1612. The judicial branch is headed by the Chief Justice and the courts comprise magistrates’ courts, the supreme court, and a court of appeal. In 2006, a commercial court was established as part of the supreme court and supreme court rules were updated.
6. Bermuda is one of the wealthiest jurisdictions in the world with per capita GDP of over US$ 75,000 in nominal terms in 2005, largely as a result of its international financial center.3 The center contributed over half of real GDP, and almost 30 percent of employment in 2006. In 2008, the population is projected to be 64,200. Bermuda issues its own currency at par with the U.S. dollar and has a consumption-based taxation system with a payroll tax of up to 12.5 percent (on employment income), inheritance tax, and various stamp duties, but no taxes on unearned income or capital gains.
7. Economic growth also reflects Bermuda’s status as a global reinsurance and direct insurance center. In 2006, real growth accelerated to 5.4 percent from an average of 3.9 percent in the previous three years, with growth of 19, 4, and 19 percent respectively in the financial intermediation, business activities, and international business activities industries. This growth reflected the inflow of catastrophe reinsurance capital following the 2005 hurricane season. Output from hotels and restaurants grew by 10 percent.4 Inflation as measured by the consumer price index was 3.8 percent in 2007.
III. FINANCIAL SYSTEM OVERVIEW
8. Bermuda is a major international financial center, mainly due to its importance as an operating base for the international insurance and reinsurance industry, and to a lesser extent for collective investment schemes. The banking sector is small and focuses on serving the international business sector. There is one stock exchange that lists domestic companies and mutual funds as well as cross-lists international companies. Trading volume in the exchange is very thin.
A. Banking
9. There are four licensed banks in Bermuda, two of which are locally-controlled—Bank of N.T. Butterfield and Son, Ltd., and Capital G. Bank Ltd.; the third, Bank of Bermuda, was purchased by HSBC—the U.K.-based banking group—in 2004, and the
3 See CIA World Factbook at http://www.cia.gov and http://www.gov.bm, Statistics. 4 See http://www.gov.bm, Statistics
9
fourth, Bermuda Commercial Bank is controlled by a Curaçao bank. Consolidated total assets of banks and the single deposit company5 amounted on average to $22 billion during 2003–2006, or four times the country’s GDP.6
10. Most banks have focused their operations on serving the growing international business sector by offering investment, trustee, and financial management services, since the growth potential for retail banking is limited by the small size of the population. An indirect indication of the reliance of banks on commercial operations targeted to the international business, particularly the insurance sector, and business overseas, is the share of their foreign assets in their combined consolidated balance sheet. At the end of 2007, the BMA reported that foreign assets accounted for 80 percent ($19.4 billion) of the total combined balance sheet of Bermuda banks and deposit companies (Table 2).
Table 2. Bermuda Financial Sector
2003 2004 2005 2006 2007Sector
(In million Bermudian dollars, unless otherwise specified)
Banks and Deposit CompaniesTotal Assets 22,404 20,487 22,371 23,100 24,168
Of which: Foreign Currency 19,504 17,221 18,570 18,831 19,412Deposit Liabilities 20,116 18,276 19,586 19,906 20,807Loans and Advances 4,845 5,497 5,890 6,806 7,351Loan/Deposit ratio (percent) 24.09 30.08 30.07 34.19 35Other assets (deposits and investments) 16,784 13,955 14,877 15,082 15,575
Investment FundsMutual funds (number) 1,321 1,637 1,609 1,715 1,679Unit trusts (number) 221 374 434 475 483Total Funds Net Asset Value 116 158 188 212 249
( $ billion, except where otherwise noted)Bermuda Stock Exchange
Market capitalization 114 100 325 350 350Number of securities listed 383 385 363 430 543
Insurance Companies 1/Gross premiums 94.7 95.3 100.7 115.8Net premiums 84.1 82.9 86.3 100.4Total assets 236.0 290.2 329.8 440.4Capital and surplus 87 107 110 158Number of companies 1,267 1,300 1,312 1,305
Source: Bermuda Monetary Authority (BMA), and BMA,Annual Reports, 2003 to 2006.1/ Includes companies holding both general and composite business licenses. Since the insurance companies havedifferent financial years, comparable aggregate data is not yet available for 2007.
5 Firms with a deposit company licence can accept only term deposits and make only mortgage-secured loans. 6 All figures in Bermudian dollars, unless otherwise specified. The Bermudian dollar is at par with the U.S.
10
11. Certain indicators suggest low risk in the banking sector. Capital adequacy in the consolidated banking sector appears adequate. The capital to risk-weighted assets ratio was 17.1 percent at end-2007 (16.8 percent at March 2008), well above the 10 percent minimum ratio required by the BMA, and up from around 15 percent at end-2005. Liquidity, as measured by the loan-deposit ratio, deteriorated to 35 percent at end-2007 from 24 percent at end-2004.7 The liquidity position of the banks, however, is still considered comfortable by rating agencies.
B. Securities Markets
Collective Investment Schemes
12. Bermuda has a large and active investment fund and investment funds services sector. The jurisdiction hosts a number of multinational financial services organizations, and is home to a large number of hedge funds, investment managers, and portfolio managers as well as internationally-active fund administrators.
13. The number of collective investment schemes (CIS) in Bermuda increased substantially during 2002–2006, favored in part by the absence of income or capital gains taxes for CIS, and reflecting the growth of the hedge fund industry.8 There were 1,303 schemes with a net asset value of $249 billion in 2007, up from 912 schemes with a net asset value of $68 billion in 2002. The schemes manage a total of 2,162 portfolios for 1,679 funds (mutual funds, umbrella funds, sub-funds, segregated accounts, and segregated account companies) and 483 trusts (unit trusts, umbrella trusts, and sub-trusts).
Stock Exchange
14. Bermuda has a stock exchange with a limited number of full-service brokerage firms. The Bermuda Stock Exchange (BSX) is a fully electronic offshore securities market that serves as a domestic market for local companies and domestic CIS, and as a venue for recording trades in internationally-listed companies. As of end-2007, there were 543 securities listed in the BSX, including 361 CIS and 37 international companies cross-listed on onshore exchanges. The total market capitalization of the BSX was $350 billion at end–2007, and $391.3 billion at March 2008, up from $150 billion in 2002.
15. The vast bulk of trading volume on the exchange takes place in international issues—the domestic market was less than one percent of market capitalization in 2007. The annual trading volume in domestic equity securities was relatively thin in 2006 at $121 million but up by two-thirds compared with 2005, and in 2007 it rose by one-third to $165 million. The number of trading members in the BSX declined to 11 in 2007 from 16 in
7 In the absence of deposit insurance and a lender of last resort, banks traditionally maintain high liquidity.
8 The legal term for CIS in Bermuda is investment fund.
11
2002. All trading members must be Bermuda-domiciled companies. The BSX also operates a clearing and settlement system and a depository. All systems are fully automated.
C. Insurance
16. With more than 1,400 registered (re)insurers, Bermuda is a significant player in the global insurance market. The Bermudian market is diversified and sophisticated. In 2006, Bermuda accounted for 12 of the top 40 global reinsurers rated by Standard and Poor’s, and 15 of the top 35 reinsurers rated by AM Best in 2004. The total number of registered insurers was 1,480 at end-2007. About 92 percent or 1,312 of the 1,421 registered insurers in 2005 were actively conducting business. They included 1,135 general insurers, 100 composite insurers, 77 long-term insurers, and 19 insurers that write domestic business. Composite insurers write a combination of general and long-term business provided that their long-term insurance business is incidental and limited9. Box 1 provides a brief history of the development of the industry.
9 Composite insurers are included in the data reported under Classes 1 to 4 insurers.
12
Box 1. Development of the Bermuda Market, in Brief
Bermuda’s insurance market began in 1947 when the founder of the American Insurance Group (AIG) based the international business of his insurance company in Bermuda. In the 1960s, Bermuda was a pioneering domicile for captive insurance companies. Bermuda remains the second largest domicile, after the U.S., for captive companies. In the mid 1980s, when there was a shortage of coverage and high prices for excess liability insurance (additional coverage when limits on underlying policy are exceeded), the reinsurance companies Ace Ltd and XL Capital Ltd (earlier Exel) were formed for the sole purpose of providing excess liability. These later offered directors’ and officers’ liability, as did one insurer established for this purpose, and eventually diversified their lines of business. In 1988 Centre Re was formed to provide the innovative structured reinsurance (“arrangements that transfer limited risk relative to aggregate premiums that could be charged under the contract”, IAIS). These companies, formed to serve the U.S. market, chose to incorporate in Bermuda because of the timeliness with which incorporation was possible and the absence of income tax. Proximity to the New York markets and association with the U.K. would also have enhanced Bermuda as a location. Following the loss of capacity in the U.S. market after the 1992 Hurricane Andrew, eight property catastrophe reinsurers entered the market. In the late 1990s, Arrow Re (Goldman Sachs) and Lehman Re (Lehman Brothers) were formed to facilitate reinsurance access to capital markets. These were followed by financial guarantee companies that provide guarantees for debt securities. In addition to the initial important sources of attraction described above, the concentration of professional insurance skills in Bermuda now appear to be of dominant importance in attracting both firms and their customers. The concentration of insurance skills creates economies of scale for risk managers and others seeking corporate insurance. Major new influxes of capital followed September 11, 2001—whose insured losses resulted in lower capacity—and the 2005 hurricanes Katrina, Rita, and Wilma. The latter wave also included the innovation of sidecars. Sidecar structures allow a reinsurer to manage the underwriting risk of a book of business in an entity that is financed through the issuance of debt and equity to the market. Sidecars permit additional capital without the need to establish a new company. Several were closed in 2007 as the need for additional capacity has declined. Source: http://www.bermuda-insurance.org
17. Bermuda legislation categorizes general insurers in four classes (see Table 3):
• Class 1: single-parent captives insuring only the risks of its owners or affiliates of the owners, or pure captives;
• Class 2: multi-owner pure captives and captive insurers deriving up to 20 percent of their net premiums from unrelated parties10;
10 “Unrelated parties” are policyholders of a captive who are not associated by ownership with the owner of the captive.
13
• Class 3: insurers not included in Classes 1, 2, or 4, including “captives” with more than 20 percent of their net premiums from unrelated parties; and
• Class 4: insurers with minimum capital and surplus of $100 million underwriting direct excess liability and/or property catastrophe reinsurance risk.
18. Measured in terms of gross written premium (GWP), the Bermudian insurance market has more than doubled from 2001 to 2006, and it continues to attract a diverse range of start-ups and innovative insurance arrangements. The attractiveness of Bermuda for the insurance sector is evidenced by the record number of 82 new insurers that were established in Bermuda in 2006, a three-year high. In particular, the bulk of new capital attracted into the global reinsurance industry by the higher premiums resulting from the 2005 hurricane season flowed into Bermuda (see Box 1).
19. Ownership in the Bermuda insurance sector is geographically diverse but dominated by U.S. companies, which owned 60 percent of the 589 active commercial insurers at end-2005. Bermudian-owned and European-owned insurers represented 18 percent and 14 percent of the market, respectively. Around one in three commercial insurers were publicly-listed companies, of which two-thirds were listed in U.S. exchanges. The insurance sector accounted for 7.6 percent of the total employment of 38,947 in Bermuda. Insurance density (premiums per head) in the domestic market was $6,072.
20. Table 4 indicates the high degree of concentration in the insurance industry. GWPs in 2006 totaled $115.8 billion, of which almost 90 percent was written by commercial insurers.11 The top ten of the commercial insurers in each of the Classes 3, 4, and long-term together, had a share of two-thirds of total market GWP, and the top 10 of the Class 4 and long-term companies had 70 percent and 98 percent of GWP in their classes, respectively.
11 Commercial insurers are Classes 3, 4, and long-term insurers and reinsurers.
14
Tabl
e 3.
Ber
mud
a: In
sura
nce
Sect
or
2003
2004
2005
2006
Insu
ranc
e In
dust
ry b
y R
egul
ator
y C
lass
1/
Cla
sses
1 a
nd 2
G
ross
pre
miu
ms
8.9
9.9
13.4
13.8
Net
pre
miu
ms
7.2
7.6
10.9
11.7
Tota
l ass
ets
38.0
48.7
51.5
55.1
Cap
ital a
nd s
urpl
us17
.820
.821
.423
.9N
umbe
r of c
ompa
nies
718
731
723
696
Cla
ss 3
G
ross
pre
miu
ms
32.9
35.8
33.8
42.3
Net
pre
miu
ms
26.0
28.1
25.0
32.6
Tota
l ass
ets
103.
912
2.5
117.
219
4.5
Cap
ital a
nd s
urpl
us34
.842
.038
.366
.8N
umbe
r of c
ompa
nies
452
469
474
490
Cla
ss 4
G
ross
pre
miu
ms
24.6
28.6
30.8
32.2
Net
pre
miu
ms
22.5
26.2
27.6
28.6
Tot
al a
sset
s72
.789
.911
6.8
135.
2C
apita
l and
sur
plus
30.0
35.6
40.9
57N
umbe
r of c
ompa
nies
3029
3838
Lon
g-te
rm in
sure
rsG
ross
pre
miu
ms
28.4
21.1
22.8
27.5
Net
pre
miu
ms
28.4
21.1
22.8
27.5
Tot
al a
sset
s21
.329
.044
.355
.6C
apita
l and
sur
plus
4.6
8.2
9.4
10.0
Num
ber o
f com
pani
es67
7177
81
So
urce
: Ber
mud
a M
onet
ary
Aut
hori
ty (B
MA
), an
d B
MA
, Ann
ual R
epor
ts, 2
003
to 2
006.
1/ In
clud
es c
ompa
nies
hol
ding
bot
h ge
nera
l and
com
posi
te b
usin
ess
licen
ses.
( $ b
illio
n, e
xcep
t whe
re o
ther
wis
e no
ted)
15
Table 4: Analysis of Gross Written Premiums in 2006
GWP of Top 10Companies by Class GWP by Class Top 10 Shares
Class Number Share GWP Share GWP All Cos Class
Number (percent) ($ million) (percent) ($ million) (percent)
1 344 26 4,768 4 2,585.0 2 542 353 27 9,029 8 4,967.0 4 553 490 38 42,302 37 26,860.0 23 634 38 3 32,217 28 22,682.0 20 70
Long-term 81 6 27,468 24 26,902.0 23 98
Total 1,306 100 115,784 100 83,996 73
Source: Bermuda Monetary Authority
21. GWP is diversified by the insurance line of business, and risk retention is generally high. Based on a survey covering two-thirds of the industry, in 2005 long-term insurers wrote 34 percent of GWP, “mixed” insurers12 26 percent, and reinsurers 16 percent. Retention rates13 are high, almost 95 percent for long-term insurers and nearly 90 percent for mixed insurers. Direct insurers and reinsurers retained about 88 and 80 percent of their GWP respectively. While GWP (and hence exposure) sourced from North America declined from 62 percent in 2003/4 to 57 percent in 2005, GWP from Europe rose from 6.7 percent (2003) to 19.4 percent. Global business represented 20.4 percent of industry GWP in 2005. 14
22. Overall, the Bermuda insurance market strengthened its capital base in 2006.15 While profitability of Bermudian reinsurers was hit by their combined 30 percent share of the insured losses from hurricanes Katrina, Rita, and Wilma (KRW), there has been a net-capital inflow. Hedge funds have been among the recent investors in the reinsurance industry, taking advantage of an innovative short-term risk transfer mechanism (sidecar) to help fill the depleted capacity caused by the hurricane losses in 2005 (see Box 1). The dominant players are the Class 4 insurers which accounted for 36 percent of the total capital and surplus at end-2006. They supply 40 percent of the property catastrophe reinsurance capacity to the U.S.
12 “Mixed” insurers are direct insurers writing more than 10 percent of reinsurance within a portfolio, or vice versa.
13 That is, the companies retain a large proportion of the insured risk on their own books, rather than reinsuring or ceding it.
14 Global business is that where premiums cover bundled cross-regional risks.
15 Bermuda Insurance Update–Howling Winds of Change (2007 Vol. 1)
16
market. Collectively, they settled $17 billion of claims arising from the 2005 hurricane season.
23. The investment profile of the industry is relatively liquid. Fifty two percent of the total assets as at end-2005 were in quoted bonds and equities, and 9.3 percent in cash and deposits. Investment and advances to affiliates represented 53 percent and 14 percent of the assets of direct insurers and composite insurers, respectively.16 In contrast, reinsurers and long-term insurers held 5 percent and 2.6 percent respectively, in intra-group balances. In 2006, quoted investments of commercial insurers were 50 percent of assets, investment in affiliates 23 percent, and cash and time deposits 8 percent. 17
24. Going forward, the main strategic concern of commercial insurers is the tradeoff between gaining/retaining market share by lowering rates, and reduced profitability. As property/casualty insurance rates have fallen in the absence of major claims since 2005, competitive pressures have increased. Greater portfolio diversification has been driven by credit rating considerations18 and potential over-capacity, the latter due partly to added pressure from state-funded capacity for catastrophe risks in the U.S. Some sidecars that have provided additional capacity to reinsurers, such as those funded by highly leveraged investors, have disappeared. Standard and Poor’s noted that the depth and breadth of senior management of the class of 2006 start-ups are noticeably weaker than previous cohorts, as technical expertise may be spread thin by the high number of start-ups since 2001. Furthermore, their strong focus on property and other catastrophe-exposed lines of business could pose a challenge if volatility risk continues to increase as experienced during recent years.
D. Regulatory Framework, Oversight, and Market Integrity Arrangements
25. Bermuda’s single regulator, the BMA, supervises the insurance, banks, trust and investment businesses, collective investment schemes, the BSX, and the credit union. It also issues the Bermudian dollar.
26. The regulatory framework is based on the following legislation:
• Bermuda Monetary Authority Act, 1969, last amended in 2006;
• Banks and Deposit Companies Act, 1999;
16 The high intra-group balance for direct insurers was distorted by one insurer who accounted investment outsourced to a subsidiary as a loan due from the subsidiary. Given the high proportion reported as intra-group balance, approval had to be obtained from the BMA to meet the minimum relevant asset requirement. All insurers have to maintain at least 75% of their relevant liabilities in the form of eligible relevant assets.
17 The information for 2005 comes from a survey which distinguished between direct insurers and reinsurers. The data for 2006 represents 63 percent of the commercial market.
18 Greater diversification is seen as increasing resilience.
17
• Insurance Act, 1978, last amended 2006;
• Investment Business Act, 2003;
• Trusts (Regulation of Trust Business) Act, 2001; and
• Investment Funds Act, 2006.
27. The BMA board is responsible for the policy and strategy of the BMA and the general administration of its affairs and business. The Board has 12 members, 3 of whom are executives appointed by the BMA subject to approval by the Minister of Finance (MOF). The minister appoints non-executive members. To enhance independence, board members are appointed for terms ranging from three to five years, and can only be removed from office for legislated reasons. The BMA’s non-executive chairman chairs the Non-Executive Directors’ (NED) Committee to provide an independent check on the performance of the executive members of the board. In 2006, the board instituted a number of reforms to its processes, restructuring the audit committee to an audit and risk management committee, and instituting a board code of conduct and conflict of interest policy, inter alia.
28. At the time of the assessment mission, the supervision of insurance was carried out by the Insurance Department (ID) of the BMA, headed by the Supervisor of Insurance. All supervisory units now report to the Deputy CEO, a post created in 2007–08. Under recent legislative change, the BMA appoints executive members of the board, though these appointments do not have effect until approved by the minister. The staff of the ID stood at 50 persons at the time of the assessment, up from about 17 in 2003, and professional staff reached 45 by end-2007. An Insurance Advisory Committee (IAC), established under the Insurance Act 1978 (the IA) advises the minister on insurance matters. A number of professional bodies and self-regulatory industry associations complement the regulatory regime.
29. Banking supervision and securities regulation is the responsibility of the Banking, Trust and Investment Department (BTI) that is under a director who reports to the Deputy CEO of the BMA. The department was restructured in 2006. The Investment Funds Act of 2006 (IFA) came into effect in March 2007. The act seeks to align the regulation of CIS with the level of sophistication of their investors, and defines three types of funds: Standard, Institutional, and Administered Funds. Most of the CIS target sophisticated and/or institutional investors, and accordingly, regulations for these schemes focus mainly on the proper disclosure of information to investors. Private funds, open to a maximum of 20 investors, are excluded from the act.
30. The main pieces of legislation governing money laundering and the financing of terrorism are the Proceeds of Crime Act 1997 (POCA), and the Proceeds of Crime (Money Laundering) Regulations 1998, and The Anti-Terrorism (Financial and Other Measures) Act 2004 (The ATFA) respectively. Important amendments to the POCA, the Criminal Justice International Cooperation (Bermuda Act), and the Financial Intelligence
18
Agency Act (FIA Act) were enacted in July 2007. The FIA Act (which was still to be put into effect in January 2008) establishes a new administrative agency (the FIA) that is being organized to take on the responsibilities of the current financial intelligence unit (FIU), part of the Bermuda police. The National Anti-Money Laundering Committee (NAMLC) brings together key ministries and departments and fills, in practice, the AML/CFT policy formulation function. NAMLC’s main legal mandate is, however, to advise the MOF and to issue industry guidance on AML issues.
E. Findings of Earlier Assessments
31. The 2003 assessment found that the regulatory and supervisory framework was well-developed in banking, key areas of securities regulation, and for AML/CFT (based on the then-standard and methodology). Some deficiencies were noted in insurance supervision—the ample powers of the BMA had not been fully realized. Annex III describes the actions taken in response to the 2003 assessments of banking and insurance supervision, and securities regulation.
32. As described below, the BMA has made extensive reforms to all areas of supervision, with the exception of the AML/CFT regime since 2003, with particularly radical improvement in insurance supervision.
IV. STRENGTHS AND VULNERABILITIES IN THE FINANCIAL SYSTEM
A. Progress in the implementation of financial standards and follow-up on 2007/08 market disturbances
Banking
33. The BMA has addressed most of the recommended actions in the 2003 report. In 2006, a major restructuring of the BTI was undertaken to support the introduction of a more formal risk-based supervisory framework and the required expertise was hired. Higher-risk institutions are identified through a standardized analysis and greater attention paid to these. An appropriate system has also been introduced to define a capital charge where there is material market risk.19 This is the first step toward putting in place the new Basel II capital adequacy framework that the BMA intends to implement in 2009. Credit evaluation and policy has also been strengthened through a policy paper that sets out the BMA’s enhanced responses in cases of large exposure, connected lending, and other risks. Policy papers also address operational and other risks. On- and off-site supervision have also been strengthened.
34. In addition to addressing the 2003 recommendations, the BMA has upgraded its policy framework to comply with the 2006 revised BCPs. The increased standard of
19 Material risk of loss on on- and off-balance sheet positions due to market price changes.
19
supervision will require continuous attention to resources. In addition, the mission recommends:
• reviewing the scope and frequency of on-site examinations;
• enhanced country exposure reporting; and
• more direct intervention tools in the event of impending bank failure.
35. The two Bermudian banks holding some sub-prime related assets in their investment portfolios have suffered mark-to-market declines in value, resulting in stepped-up scrutiny from the BMA. The assets are higher rated tranches of asset-backed credits, representing 10 to 15 percent of their investment portfolios, and are held-to-maturity investments. As a result, the banks and their auditors are of the view that there has not been permanent value impairment. The BMA is reviewing portfolio details on a monthly basis, and holding meetings with management to monitor portfolio management.
Insurance
36. In insurance, the BMA has instituted a strongly risk-focused supervisory approach in line with the diversified range of insurers in Bermuda. Supervisory scope and intensity is determined by an assessment of the likely scale of impact of a risk, as well as of its likelihood.
37. There is a high level of observance of the IAIS core principles. The ID’s goal of becoming a leading international regulator has resulted in a well-designed process of staff, systems, and framework upgrading that is proceeding expeditiously. Taking account of the 2003 assessment recommendations, the IA has been amended several times and initial guidance was introduced. The 2006 Amendment Act revised the framework to introduce more detailed licensing criteria, and required the BMA to publish a Statement of Principles and introduce a code of conduct. It also introduced a detailed regime for oversight of insurance controllers. Annex I provides the Report on the Observance of Standards and Codes (ROSC) for the IAIS insurance core principles assessment of the supervision on commercial insurers.
38. Implementation of a risk-focused framework, that assigns risk factors to the companies, has been started. Insurers are ranked by risk likelihood and impact. A riskier categorization results in increased supervisory focus including on-site inspection. The framework will also include a risk-based solvency regime. The licensing function has also been revamped with strengthened criteria, and enhanced regulatory reporting will be introduced.
20
39. Oversight of Classes 1 and 2, predominantly captives, is supported through the insurance manager infrastructure. 20These managers are licensed and integrated into the supervisory process. Management services give the supervisor a means of monitoring and inspecting numerous small companies by providing a focal control point representative of the management of the captives.
40. Effective and comprehensive implementation of the risk-based regulatory system will depend on:
• continuous review of regulatory resources;
• preservation of regulatory independence;
• high transparency and disclosure to enhance recognition and support supervision; and
• risk rating Class 3 companies to allow for the granular tailoring of supervisory stance currently available for Class 4.
41. The sub-prime-related exposures are affecting or could affect Bermudian companies mainly through four principal channels: investment in structured products, financial guarantee portfolios, liquidity positions, and potential claims on professional and executive liability insurance. The conservative investments of many Bermuda-based insurers have limited their direct exposure.21 Nevertheless, asset valuation uncertainty is affecting insurers (for example, AIG was downgraded and life reinsurer Scottish Re bought out). Fitch notes that, while Bermudian insurers place a higher proportion of invested assets in MBS and ABS than do U.S. insurers, the credit quality of their MBS and ABS remained high despite recent pressure. 22 It would appear that exposure has been greatest for shareholders in financial guarantors who insured structured products, with the financial guarantee industry under considerable stress; for example, XL has been downgraded in part because of its exposure to a bond insurer. Exposures to loss from executive and professional liability are not yet known but these are reported to be reserved. 23
20 An insurance manager is “a person who, not being an employee of any insurer, holds himself out as manager in relation to one of more insurers, whether or not the functions performed by him as such go beyond the keeping of insurance business accounts and records.” (IA)
21 See Guy Carpenter and Company, LLC Managing Prosperity: 2008 Bermuda Update Report, May 2008. The companies referred to in their reports are 25 insurance holding Bermuda-domiciled companies that they analyze on a regular basis. .
22 See Fitch Ratings, Bermuda Market Overview, March 3, 2008
23 See Benfield Bermuda Quarterly, March 2008. These exposures, usually referred to as director and officers’ liability and errors and omissions, could arise, for example, from claims on the companies that created structured products.
21
42. The BMA has taken a proactive approach to the sub-prime crisis. It conducted two surveys in August and November 2007 to assess investment and underwriting exposure to sub-prime risk, and evaluate insurers’ risk management programs. The studies analyzed the four main areas of potential exposure and conducted stress tests, concluding that there is no systemic stress to the Bermuda market. A few companies were identified for enhanced supervision and monitoring. This work has been shared with related home or host supervisors in other jurisdictions and discussed at IAIS meetings. A guidance note on reserving practices for financial guarantee insurers has been issued for consultation.
Securities
43. The BMA has improved its ability to oversee CIS. New legislation provides full powers of information-gathering and inspection, as well as fund and prospectus rules. A dedicated investment funds team with additional experienced staff has been established and Fund administrator licensing has begun.
44. Other upgrades in securities regulation cover market intermediation and clearing and settlement. The BMA staff’s technical skills have been upgraded through recruitment and training, and clearer rules and guidance for inspection of investment providers have been put in place. Through the Investment Business Act, 2003, the BMA now has the authority to license clearance and settlement systems (currently only provided by the BSX). In addition, the offences of market manipulation and insider dealing were introduced by 2004 legislation.
Anti-money Laundering and Combating the Financing of Terrorism
45. The AML/CFT regime has not been much changed since the AML legislation of 1998 and the 2003 IMF assessment. Apart from the 2004 ATFA Act and some changes to the POCA, revisions to the guidance notes resulting from recommendations of the 2003 assessment are still in draft. Therefore, Bermuda has not kept pace with the FATF Recommendations and has not been able to introduce the risk-sensitive approaches to financial institution oversight permitted under the FATF 40+9.24 The regulatory framework does not address CFT issues, and customer due-diligence requirements are narrowly focused on customer identification. Enhanced capacity and resources are required to strengthen AML/CFT supervision in key industries. The new laws, POCA, the Bermuda Act, and the FIA Act address a number of the weaknesses in the AML/CFT legal framework identified by the mission. Annex II provides the ROSC for the assessment of the implementation of the FATF Recommendations for AML/CFT.
24 New legislation (in draft at the time of the AML/CFT assessment mission) was passed in June 2007.
22
B. Stress Test Results for Class 4 and Long-Term Issuers
46. Ten of the 41 Class 4 and long-term insurers used their internal models to calculate the impact of various shocks, but these did not affect their ability to meet regulatory requirements. Results were reported in terms of the reporting requirements of the BMA, viz. change in capital and surplus, minimum regulatory premium ratio, and minimum regulatory loss reserves ratio. All of the companies employed a combination of proprietary and in-house models to analyze their risk exposures. The scenarios included three natural catastrophe events, two pandemic events, and worst-case scenarios that each firm in the sample was asked to specify for itself. The catastrophic events were found to have a high negative effect on companies’ capital, with the most severe impact resulting from the worst-case scenarios, only two of which included economic (in addition to natural catastrophe) events. No companies in the sample fell below the regulatory requirements, demonstrating the strong balance sheets of the companies.
47. Due to time constraints faced by the BMA and tested companies, the stress tests only covered a subset of the risk factors considered necessary to obtain an overall risk profile. However, more comprehensive assessment of risks would be obtained by use of a wider variety of stress tests (including financial market effects, and stresses on assets for example), and employment of economic valuation rather than accounting data. The single company that combined economic recession and catastrophic events in its worst-case scenario had a worse outturn than the others, suggesting that future stress testing could usefully focus on examining the effects of combining extreme events to obtain more insight into possible vulnerabilities. The BMA should also devote resources to understanding the companies’ models to learn the strengths and weaknesses of their risk analyses.
C. Cross-border Cooperation and Information Exchange
48. The BMA does not require a formal agreement or memorandum of understanding (MOU) to provide assistance to other supervisors. However, it has been willing to enter into bilateral MOUs where other authorities prefer to document mutual commitments by this means. The BMA has the ability to share confidential information with foreign supervisory authorities under “gateway” provisions in its regulatory laws. It also has specific powers to compel the production of information from licensed persons where the information is not required for its supervisory purposes, but only in order to assist a third country supervisor.
49. In relation to compulsory power, the BMAA, 1969, (Sections 30A to 30C) provides powers for assisting foreign regulatory authorities. The BMA is, however, required to take account of certain matters prior to providing the requested information. These include the likelihood of reciprocity, whether the requesting foreign regulatory authority has legislation and requirements similar to those of Bermuda law protecting the confidentiality of information provided to it, public interest, the nature and seriousness of the issue, and whether the requesting authorities will meet costs if required to do so.
23
50. There are also sectoral provisions for cooperation and information exchange. Section 52B(2) of the IA provides for assistance to be given to requesting authorities exercising similar regulatory functions without requiring strict reciprocity. In addition, there are two MOUs specifically covering insurance, and the BMA has applied to be a signatory of the IAIS’s multilateral MOU. The 2003 IOSCO assessment had found that the BMA had fully implemented the IOSCO standard on cooperation. In addition, in 2007 the BMA signed IOSCO’s Multilateral MOU. The guidance on consolidated supervision in the banking sector has been revised in line with the 2006 BCP.
51. As a regulator in an important home jurisdiction for insurance, while existing provisions are adequate, enhanced cooperation would be valuable. The mission recommends that the BMA implement routine arrangements to alert host supervisors of material developments, formalize exchanges with state insurance supervisors in the U.S. and the U.K. FSA, and consider joint inspections.
52. Bermuda has a comprehensive legal and institutional framework for international cooperation that is largely consistent with international standards for AML/CFT purposes, but there is a need to strengthen cooperation mechanisms among governmental institutions for AML/CFT.
24
ANNEX I. Report on the Observance of Standards and Codes (ROSC) for the IAIS Insurance Core Principles
Introduction
Regulatory initiatives, expanded supervision, and increased staffing have strengthened Bermuda’s insurance supervisory regime since 2003. Taking account of the recommendations of the 2003 OFC assessment, the authorities introduced a phased program to update legislation and supervisory practices. The BMA has significantly enhanced its risk-based approach that is aligned with the diversified range of insurance entities domiciled in Bermuda. The updated framework has a high level of observance of the IAIS core principles, but implementation of the reforms is in transition. The BMA’s vision is to become a regulatory leader before 2010. Strong commitment to sound regulation by the industry contributes to this vision, but has to be constantly balanced with preserving regulatory independence and effectiveness.
Executive Summary
This assessment benchmarks Bermuda’s regulatory regime against the IAIS core principles based on the 2003 IAIS methodology. The assessment was conducted from June 11–22, 200725.
This ROSC covers commercial direct insurers and reinsurers classified as Classes 3, 4, and long-term under the Bermudian regime (commercial insurers). Comments on Class 3 insurers apply to long-term insurers unless stated otherwise. Captive insurers holding Class 1 and 2 licenses are covered in a separate factual update.
Information and methodology used for assessment
The assessments are based solely on the laws, regulations, and other supervisory requirements and practices that are in place at the time of assessment. In particular, the BMA is finalizing a risk-based solvency regime that will be complemented by enhanced regulatory reporting. These ongoing regulatory initiatives are noted by way of additional comments. The assessment was facilitated by meetings with industry bodies and insurers that were coordinated by the BMA, as well as by technical discussions with, and briefings by the authority.
Institutional and market structure—overview
The BMA has had authority for regulating, supervising, and inspecting virtually all of Bermuda’s regulated financial sector, including insurance, since 2002 under the BMA Act, 1969. An Insurance Advisory Committee (IAC) established under the IA advises the MOF on insurance matters. The non-executive chairman chairs the Non-Executive Directors
25 The assessment was conducted by Henning Göbel and Su Hoong Chang.
25
Committee which provides an independent check on the performance of the board and the BMA.
Bermuda is a significant player in the global insurance market with over 1,400 registered (re)insurance companies, 92 percent (1,312) of which were active at end-2005. They comprise 1,135 general, 100 composite, 77 long-term insurers, and 19 domestic insurers. Composite insurers are permitted to write both general and long-term insurance provided the long-term is incidental and limited. The general insurers are licensed in four classes:
• Class 1—pure captives;
• Class 2—multi-owner pure captives and those deriving up to 20 percent of net premiums from unrelated parties;
• Class 3—insurers not included in Classes 1, 2, or 4;
• Class 4—insurers with minimum capital of B$100 million underwriting direct excess liability insurance and/or property catastrophe.
Gross written premiums in 2005 totaled B$100.7 billion of which 87 percent were written by commercial insurers. Average net risk retention rates were 94 and 87 percent of GWP for long-term and “ mixed” insurers respectively. 26 Direct insurers and reinsurers retained about 88 and 90 percent of GWP respectively. The Bermuda insurance market strengthened its capital base in 2006, with a net capital inflow following hurricanes Katrina, Rita, and Wilma. Their investment is relatively liquid with 52 percent of total assets in quoted bonds and equities at end-2005, and 9.3 percent in cash and deposits.
Main findings
The insurance regulatory and supervisory regime demonstrates a high level of observance of the IAIS standards, as described below:
(i) Conditions for effective insurance supervision (ICP1)—the Bermuda financial sector policy is supported by an efficient financial market structure, including specialized skills, and facilitated by easy access to U.S. financial markets.
(ii) The supervisory system (ICPs 2–5)—The BMA is a fully empowered insurance regulator with extensive operational and financial autonomy. It continues recruitment to effectively execute its enhanced supervisory framework. The relationship with industry should be constantly reviewed to preserve regulatory independence. The BMA has started implementation of its risk-focused supervisory framework with Class 4 insurers. The framework bases supervisory attention on assigned company ratings that take account of the impact and probability of risky events. Enhanced regulatory reporting will complement this
26 “Mixed” insurers write more than 10 percent of reinsurance within an insurance portfolio or vice-versa.
26
risk-focused approach. While the licensing categories are broadly risk-based, Class 3s are a mix of entities, and the classification could be reviewed. Cooperation and information sharing are satisfactory and the BMA is encouraged to make routine and formalize some arrangements.
(iii) The supervised entities (ICPs 6–10)—the licensing process is systematic and efficient and the BMA has recently made arrangements to ensure home-host consultation on the licensing of cross-border establishments. The BMA has clear criteria and guidance for vetting owners and key management and for approving changes in control, but should acquire the power to approve the transfer of insurance portfolios. The corporate framework in place is supported by a formalized on-site inspection program.
(iv) Ongoing supervision (ICPs 11–17)—The BMA has made significant progress in strengthening regulatory reporting and off-site monitoring. Early formulation and implementation of a regime for group supervision of Bermuda-based insurance groups would help reduce regulatory risks. A formal on-site inspections program was introduced in 2006. Its active market analysis will be strengthened by enhanced regulatory reporting and the ongoing increase in resources. Intervention powers and sanctions are well-defined. Winding up and exits have been administered without disruption but the BMA should consider clarifying the priority of policyholders’ claims in composite insurers and those insurers with non-insurer business in the same legal entity. The BMA should clarity the conditions under which insurers are allowed to encumber assets held for the benefit of policyholders.
(v) Prudential requirements (ICPs 18–22)—The current solvency regime sets a minimum capital and surplus based on class of licence, subject to two other criteria based on net written premiums or net reserves with floors. Class 4 insurers must hold a minimum of B$100 million. At the time of the assessment the regime did not address double or multiple gearing of capital, but the BMA is consulting Class 4 insurers on a risk-based solvency regime. The BMA has provided guidance to insurers on its expectations for their risk management systems whose practical assessment is facilitated by ongoing inspections. Disclosure requirements should be established for derivatives and similar commitments, and the BMA is advised to issue guidance on the basis and adequacy of technical provisions.
(vi) Markets and consumers (ICPs 24–27)—The regulatory requirements for intermediaries are appropriate for the small domestic market. Insurance fraud is not an issue and is effectively covered under the criminal code and proceeds of crime regulation. The BMA should plan to implement the IAIS supervisory standard on public disclosures to facilitate market discipline.
(vii) AML/CFT (ICP28)—not assessed.
Table 5 outlines these findings on a principle-by principle basis.
27
Tabl
e 5.
Sum
mar
y of
Obs
erva
nce
of th
e In
sura
nce
Cor
e Pr
inci
ples
Insu
ranc
e C
ore
Prin
cipl
e C
omm
ents
ICP1
—co
nditi
ons f
or e
ffect
ive
insu
ranc
e su
perv
isio
n
Ber
mud
a ha
s a p
rogr
essi
ve fi
nanc
ial s
ecto
r pol
icy
supp
orte
d by
eff
icie
nt fi
nanc
ial m
arke
t inf
rast
ruct
ure.
The
Ber
mud
ian
insu
ranc
e in
dust
ry c
ontin
ues t
o at
tract
skill
ed p
rofe
ssio
nals
, loc
ally
and
abr
oad.
Eas
y ac
cess
to th
e m
atur
e fin
anci
al m
arke
ts in
the
U.S
. fac
ilita
tes
effe
ctiv
e as
set-l
iabi
lity
man
agem
ent b
y in
sure
rs.
ICP2
—Su
perv
isor
y ob
ject
ives
Th
e pr
inci
pal o
bjec
tives
of t
he a
utho
rity
and
ID a
re c
lear
. The
BM
A’s
mul
tiple
man
date
s, in
clud
ing
fost
erin
g cl
ose
rela
tions
with
fin
anci
al in
stitu
tions
, hav
e to
be
cons
tant
ly b
alan
ced
to e
nsur
e its
inde
pend
ence
and
eff
ectiv
enes
s.
ICP3
—Su
perv
isor
y au
thor
ity
The
auth
ority
has
ext
ensi
ve o
pera
tiona
l and
fina
ncia
l aut
onom
y. It
is fu
lly e
mpo
wer
ed to
adm
inis
ter a
nd e
nfor
ce th
e IA
. It h
as d
raw
n up
a
com
preh
ensi
ve p
lan
to re
crui
t reg
ulat
ory
staf
f to
impl
emen
t the
enh
ance
d su
perv
isor
y fr
amew
ork.
At t
he ti
me
of a
sses
smen
t, th
e B
MA
was
act
ivel
y re
crui
ting
to c
ompl
ete
its re
crui
tmen
t pla
n. S
trong
com
mitm
ent f
rom
indu
stry
pla
yers
con
tribu
tes p
ositi
vely
to th
e B
MA
vis
ion
to b
e a
regu
lato
ry le
ader
. Non
ethe
less
, the
aut
horit
y’s r
elat
ions
hip
with
the
indu
stry
shou
ld b
e co
nsta
ntly
revi
ewed
with
th
e vi
ew to
pre
serv
ing
regu
lato
ry in
depe
nden
ce a
nd c
redi
bilit
y.
ICP4
—Su
perv
isor
y pr
oces
s Th
e B
MA
has
impl
emen
ted
sign
ifica
nt e
nhan
cem
ents
to it
s ris
k-fo
cuse
d su
perv
isor
y fr
amew
ork.
Impl
emen
tatio
n ha
s sta
rted
with
cla
ss
4 in
sure
rs a
nd w
ill b
e pr
ogre
ssiv
ely
rolle
d ou
t to
Cla
ss 3
and
long
-term
insu
rers
bas
ed o
n th
eir c
ompo
site
risk
ratin
gs. T
he B
MA
is
desi
gnin
g en
hanc
ed re
gula
tory
repo
rting
to c
ompl
emen
t the
enh
ance
d su
perv
isor
y fr
amew
ork
and
the
prop
osed
risk
-bas
ed so
lven
cy
regi
me.
Whi
le th
e cu
rren
t lic
ensi
ng c
ateg
orie
s are
bro
adly
risk
-bas
ed, C
lass
3 in
sure
rs a
re a
mix
of e
ntiti
es w
ith v
aryi
ng ri
sk p
rofil
es. G
oing
fo
rwar
d an
d af
ter t
he B
MA
has
gai
ned
expe
rienc
e w
ith th
e ris
k-ba
sed
supe
rvis
ory
fram
ewor
k, th
ere
are
mer
its in
revi
ewin
g th
e re
leva
nce
of th
e C
lass
3 c
ateg
ory
as th
eir c
ompo
site
risk
ratin
gs p
rovi
de m
ore
gran
ular
ity.
ICP5
—Su
perv
isor
y co
oper
atio
n an
d in
form
atio
n sh
arin
g
The
IA p
rovi
des c
lear
gro
unds
and
pow
er to
the
auth
ority
to c
oope
rate
and
exc
hang
e in
form
atio
n do
mes
tical
ly a
nd w
ith fo
reig
n re
gula
tors
. The
aut
horit
y is
enc
oura
ged
to e
xecu
te ro
utin
e ar
rang
emen
ts to
ale
rt ho
st su
perv
isor
s of m
ater
ial s
uper
viso
ry d
evel
opm
ents
in
Ber
mud
a an
d to
form
aliz
e th
e in
form
al e
xcha
nges
with
stat
e in
sura
nce
regu
lato
rs in
the
U.S
.
ICP6
—Li
cens
ing
The
licen
sing
pro
cess
is s
yste
mat
ic a
nd e
ffic
ient
, ena
blin
g th
e au
thor
ity to
reac
h de
cisi
ons i
n a
timel
y m
anne
r. Th
e B
MA
has
es
tabl
ishe
d ro
bust
crit
eria
for v
ettin
g th
e ap
plic
atio
ns. I
n vi
ew o
f the
inte
rnat
iona
l nat
ure
of in
sure
rs d
omic
iled
in B
erm
uda,
the
auth
ority
has
rece
ntly
intro
duce
d ar
rang
emen
ts to
liai
se w
ith re
leva
nt o
vers
eas a
utho
ritie
s whe
re li
cens
ing
appl
icat
ions
rela
te to
br
anch
es o
r sub
sidi
arie
s of f
orei
gn re
gula
ted
insu
rers
.
ICP7
—Su
itabi
lity
of p
erso
ns
The
BM
A h
as e
stab
lishe
d cl
ear c
riter
ia a
nd g
uida
nce
for v
ettin
g th
e su
itabi
lity
of si
gnifi
cant
ow
ners
, sen
ior m
anag
emen
t, an
d ke
y fu
nctio
narie
s.
28
Insu
ranc
e C
ore
Prin
cipl
e C
omm
ents
ICP8
—C
hang
es in
con
trol a
nd
portf
olio
tran
sfer
s W
hile
the
BM
A h
as st
reng
then
ed th
e cr
iteria
and
requ
irem
ents
for a
ppro
ving
cha
nges
in c
ontro
l, it
does
not
requ
ire th
at in
sure
rs o
btai
n its
app
rova
l for
por
tfolio
tran
sfer
s. To
safe
guar
d th
e in
tere
sts o
f the
pol
icyh
olde
rs o
f bot
h th
e tra
nsfe
ree
and
trans
fero
r, th
e au
thor
ity
shou
ld a
t lea
st b
e no
tifie
d of
por
tfolio
tran
sfer
s and
be
give
n ve
to p
ower
on
such
tran
sfer
s.
ICP9
—C
orpo
rate
gov
erna
nce
The
corp
orat
e go
vern
ance
fram
ewor
k is
in p
lace
, sup
porte
d by
a fo
rmal
ized
on-
site
insp
ectio
ns p
rogr
am, i
nclu
ding
ass
essm
ent o
f the
ad
equa
cy a
nd a
ctua
l im
plem
enta
tion
of in
sure
rs’ c
orpo
rate
gov
erna
nce.
The
on-
site
pro
gram
will
be
prog
ress
ivel
y im
plem
ente
d in
C
lass
3 a
nd lo
ng-te
rm in
sure
rs.
The
BM
A is
adv
ised
to p
rovi
de fo
rmal
gui
danc
e to
insu
rers
on
its e
xpec
tatio
ns w
ith re
gard
to th
e re
mun
erat
ion
polic
y fo
r dire
ctor
s and
se
nior
man
agem
ent.
ICP1
0—In
tern
al c
ontro
ls
The
BM
A’s
gui
danc
e on
risk
man
agem
ent a
nd in
tern
al c
ontro
ls se
ts o
ut it
s exp
ecta
tions
of i
nsur
ers i
n th
ese
area
s cle
arly
. The
on-
site
in
spec
tions
pro
gram
has
star
ted
in C
lass
4 in
200
6 an
d w
ill b
e pr
ogre
ssiv
ely
impl
emen
ted
in C
lass
3 a
nd lo
ng-te
rm in
sure
rs. T
his w
ill
help
the
BM
A h
ave
a be
tter u
nder
stan
ding
of i
nsur
ers’
inte
rnal
con
trols
.
In li
ne w
ith in
tern
atio
nal b
est p
ract
ices
, the
BM
A is
adv
ised
to re
quire
loss
rese
rve
spec
ialis
ts a
nd th
e ap
prov
ed a
ctua
ry to
hav
e a
dire
ct
repo
rting
rela
tions
hip
to th
e bo
ard
of d
irect
ors.
ICP
11—
Mar
ket a
naly
sis
Giv
en th
e in
tern
atio
nal o
pera
tions
of B
erm
udia
n in
sure
rs, t
he B
MA
is a
ctiv
ely
mon
itorin
g an
d an
alyz
ing
avai
labl
e in
form
atio
n to
id
entif
y cu
rren
t and
em
ergi
ng tr
ends
in th
e gl
obal
insu
ranc
e m
arke
ts. I
ts m
arke
t ana
lysi
s will
be
stre
ngth
ened
by
enha
nced
regu
lato
ry
repo
rting
and
the
plan
ned
incr
ease
in re
sour
ces.
ICP1
2—R
epor
ting
to
supe
rvis
ors a
nd o
ff-s
ite
mon
itorin
g
The
BM
A h
as m
ade
sign
ifica
nt p
rogr
ess i
n st
reng
then
ing
its re
gula
tory
repo
rting
and
off
-site
mon
itorin
g. It
shou
ld c
ontin
ue to
pus
h fo
rwar
d its
pro
posa
l to
enha
nce
the
com
preh
ensi
vene
ss o
f rep
ortin
g by
insu
rers
.
The
BM
A sh
ould
giv
e du
e co
nsid
erat
ion
to a
) im
prov
ing
the
timel
ines
s of r
epor
ting
by in
trodu
cing
qua
rterly
repo
rting
that
wou
ld fo
cus
on k
ey in
dica
tors
and
app
ropr
iate
man
agem
ent r
epor
ts; b
) req
uirin
g in
sure
rs to
subm
it in
form
atio
n ab
out t
heir
finan
cial
con
ditio
n an
d pe
rfor
man
ce o
n bo
th a
solo
and
a g
roup
-wid
e ba
sis;
and
c) c
larif
ying
that
all
insu
rers
mus
t mai
ntai
n pr
oper
boo
ks o
f acc
ount
s in
Ber
mud
a.
ICP1
3—O
n-si
te in
spec
tion
The
BM
A c
ondu
cts o
n-si
te in
spec
tions
as p
art o
f its
risk
-bas
ed su
perv
isor
y re
gim
e in
trodu
ced
in 2
006.
Thi
s pro
gram
will
be
prog
ress
ivel
y ex
tend
ed to
Cla
ss 3
and
long
-term
insu
rers
.
ICP
14—
Prev
entiv
e an
d co
rrec
tive
mea
sure
s Th
e IA
em
pow
ers t
he B
MA
to ta
ke a
rang
e of
pro
porti
onat
e in
terv
entio
n po
wer
s with
cle
arly
def
ined
trig
gers
and
con
ditio
ns. T
he
BM
A ta
kes a
mea
sure
d ap
proa
ch to
ass
essi
ng th
e se
verit
y of
the
conc
erns
and
wor
ks w
ith th
e in
sure
rs to
take
app
ropr
iate
rem
edia
l m
easu
res.
ICP1
5—En
forc
emen
t or
The
BM
A h
as w
ide
rang
ing
pow
ers t
o en
forc
e th
e IA
and
impo
se sa
nctio
ns fo
r bre
ache
s of t
he IA
, or t
o ad
dres
s ser
ious
regu
lato
ry
29
Insu
ranc
e C
ore
Prin
cipl
e C
omm
ents
sanc
tions
co
ncer
ns.
ICP1
6—W
indi
ng-u
p or
exi
t fr
om th
e m
arke
t W
indi
ng-u
p an
d ex
its h
ave
been
adm
inis
tere
d w
ithou
t dis
rupt
ions
to th
e m
arke
t. N
onet
hele
ss, t
he B
MA
shou
ld g
ive
due
cons
ider
atio
n to
cla
rifyi
ng th
e pr
iorit
y of
pol
icyh
olde
rs’ c
laim
s for
gra
ndfa
ther
ed c
ompo
site
insu
rers
and
insu
rers
allo
wed
to u
nder
take
non
-insu
ranc
e re
late
d bu
sine
ss w
ithin
the
sam
e le
gal e
ntity
. The
BM
A sh
ould
als
o fo
rmul
ate
a cl
ear p
olic
y st
ance
on
insu
rers
’ cre
dit f
acili
ties a
nd th
e co
nditi
ons u
nder
whi
ch th
ey a
re a
llow
ed to
enc
umbe
r/ple
dge
asse
ts h
eld
for t
he b
enef
it of
pol
icyh
olde
rs.
ICP1
7—G
roup
-wid
e su
perv
isio
n
Rec
ogni
zing
the
sign
ifica
nt n
umbe
r of l
arge
Ber
mud
a-ba
sed
insu
ranc
e gr
oups
, ear
ly fo
rmul
atio
n an
d im
plem
enta
tion
of a
pra
gmat
ic
and
effe
ctiv
e re
gim
e fo
r gro
up su
perv
isio
n he
lps t
o re
duce
regu
lato
ry ri
sks t
o th
e B
MA
.
ICP1
8—R
isk
asse
ssm
ent a
nd
man
agem
ent
The
BM
A h
as p
rovi
ded
guid
ance
to in
sure
rs o
n its
exp
ecta
tions
on
thei
r ris
k as
sess
men
t and
man
agem
ent.
On-
goin
g in
spec
tions
of
Cla
ss 4
insu
rers
faci
litat
e pr
actic
al a
sses
smen
t of t
heir
risk
man
agem
ent f
ram
ewor
ks, a
nd th
is w
ill b
e ex
tend
ed to
Cla
ss 3
and
long
-term
in
sure
rs.
The
BM
A is
adv
ised
to c
onsi
der f
orm
ulat
ing
a re
gula
tory
stan
ce o
n fu
nctio
ns o
utso
urce
d by
an
insu
rer,
incl
udin
g po
wer
s to
insp
ect
third
par
ty se
rvic
e pr
ovid
ers.
ICP1
9—In
sura
nce
activ
ity
Whi
le th
e B
MA
requ
ires i
nsur
ers t
o ev
alua
te a
nd m
anag
e th
eir u
nder
writ
ing
risks
, the
re is
scop
e fo
r cle
arer
gui
danc
e on
ade
quac
y of
re
insu
ranc
e ar
rang
emen
ts a
s wel
l as t
reat
men
t of r
eins
uran
ce re
cove
rabl
es.
ICP2
0—Li
abili
ties
The
BM
A re
lies o
n th
e LR
S or
app
rove
d ac
tuar
y to
opi
ne o
n in
sure
rs’ t
echn
ical
pro
visi
ons.
In th
is re
gard
, the
aut
horit
y is
adv
ised
to
wor
k cl
osel
y w
ith th
e re
leva
nt p
rofe
ssio
nal a
ssoc
iatio
ns to
issu
e gu
idan
ce o
n th
e ba
sis a
nd a
dequ
acy
of te
chni
cal p
rovi
sion
s. V
alua
tion
of th
e am
ount
s rec
over
able
und
er re
insu
ranc
e ar
rang
emen
ts sh
ould
be
clar
ified
.
ICP2
1—In
vest
men
ts
The
BM
A h
as o
utlin
ed th
e st
anda
rd e
xpec
ted
of in
sure
rs’ i
nves
tmen
t man
agem
ent a
nd ri
sk m
anag
emen
t. It
shou
ld c
onsi
der e
stab
lishi
ng
clea
r gui
danc
e on
ass
et-li
abili
ty m
anag
emen
t, co
ncen
tratio
n ris
ks a
nd a
sset
val
uatio
n as
par
t of i
ts ri
sk-b
ased
cap
ital f
ram
ewor
k.
ICP2
2—D
eriv
ativ
es a
nd
sim
ilar c
omm
itmen
ts
The
regu
lato
ry re
quire
men
ts fo
r ins
urer
s to
adop
t sou
nd a
nd p
rude
nt p
olic
ies a
nd p
roce
sses
for d
eriv
ativ
e ac
tiviti
es a
re in
pla
ce. T
o al
low
mon
itorin
g of
insu
rers
’ exp
osur
es, t
he B
MA
shou
ld e
stab
lish
disc
losu
re re
quire
men
ts fo
r der
ivat
ives
and
sim
ilar c
omm
itmen
ts.
ICP2
3—C
apita
l ade
quac
y an
d so
lven
cy
The
curr
ent s
olve
ncy
regi
me
is fa
ctor
-bas
ed w
ith a
n en
hanc
ed th
resh
old
of B
$100
mill
ion
for C
lass
4 in
sure
rs. I
t doe
s not
add
ress
in
flatio
n of
cap
ital (
thro
ugh
doub
le o
r mul
tiple
gea
ring
or in
tra-g
roup
tran
sact
ions
) and
suita
ble
form
s of c
apita
l res
ourc
es. T
he B
MA
is
curr
ently
con
sulti
ng C
lass
4 in
sure
rs o
n a
risk-
base
d so
lven
cy re
gim
e.
ICP2
4—In
term
edia
ries
The
BM
A’s
requ
irem
ents
are
app
ropr
iate
for B
erm
uda’
s sm
all d
omes
tic m
arke
t and
clo
se p
roxi
mity
, whi
ch e
ffect
ivel
y re
duce
s the
role
of
inte
rmed
iarie
s at t
he re
tail
leve
l.
ICP2
5—C
onsu
mer
pro
tect
ion
The
curr
ent r
egim
e fo
r con
sum
er p
rote
ctio
n is
ade
quat
e fo
r the
reta
il se
gmen
t acc
ount
s for
a n
eglig
ible
0.1
per
cent
of t
otal
NW
P of
the
30
Insu
ranc
e C
ore
Prin
cipl
e C
omm
ents
indu
stry
.
ICP2
6—In
form
atio
n,
disc
losu
re a
nd tr
ansp
aren
cy
tow
ards
mar
kets
To fa
cilit
ate
mar
ket d
isci
plin
e, th
e B
MA
shou
ld fo
rmul
ate
plan
s to
impl
emen
t the
IAIS
supe
rvis
ory
stan
dard
s on
publ
ic d
iscl
osur
es.
ICP2
7—Fr
aud
Insu
ranc
e fr
aud
is e
ffect
ivel
y co
vere
d un
der t
he C
rimin
al C
ode
and
the
Proc
eeds
of C
rime
Reg
ulat
ions
. The
BM
A’s
revi
ew o
f ins
urer
s’
risk
man
agem
ent a
nd in
tern
al c
ontro
ls h
elps
to id
entif
y an
d m
anag
e fr
aud
risks
.
ICP2
8—A
nti-m
oney
-la
unde
ring,
com
batin
g th
e fin
anci
ng o
f ter
roris
m
Not
ass
esse
d.
31
Rec
omm
ende
d ac
tion
plan
Tabl
e 2.
Rec
omm
ende
d Ac
tion
Plan
to Im
prov
e O
bser
vanc
e of
the
Insu
ranc
e C
ore
Prin
cipl
es
Prin
cipl
e R
eco
mm
ende
dA
ctio
n
ICP
3—Su
perv
isor
y A
utho
rity.
Con
side
r: a)
pub
lic d
iscl
osur
e of
info
rmat
ion
abou
t pro
blem
or f
aile
d in
sure
rs, i
nclu
ding
supe
rvis
ory
actio
ns ta
ken
with
out c
ompr
omis
ing
conf
iden
tialit
y co
nsid
erat
ions
; and
b) s
treng
then
ing
mea
sure
s to
ensu
re th
at, w
here
supe
rvis
ory
func
tions
are
out
sour
ced,
pot
entia
l con
flict
of
inte
rest
s is m
inim
ized
.
ICP4
—Su
perv
isor
y pr
oces
s.
Rev
iew
the
rele
vanc
e of
Cla
ss 3
cat
egor
y af
ter t
he B
MA
has
gai
ned
expe
rienc
e w
ith th
e ris
k-ba
sed
supe
rvis
ory
fram
ewor
k, th
at p
rovi
des g
reat
er
gran
ular
ity.
ICP
5—Su
perv
isor
y co
oper
atio
n an
d in
form
atio
n sh
arin
g.
Impl
emen
t rou
tine
arra
ngem
ents
to a
lert
host
supe
rvis
ors o
f mat
eria
l sup
ervi
sory
dev
elop
men
ts in
Ber
mud
a, fo
rmal
ize
the
info
rmal
exc
hang
es
with
stat
e in
sura
nce
regu
lato
rs in
the
U.S
. and
con
side
r joi
nt in
spec
tions
with
fore
ign
regu
lato
rs.
ICP
8—Ch
ange
s in
cont
rol a
nd
portf
olio
tran
sfer
s. R
equi
re in
sure
rs to
not
ify p
ortfo
lio tr
ansf
ers s
ubje
ct to
the
BM
A’s
vet
o po
wer
on
such
tran
sfer
s.
ICP
9— C
orpo
rate
gov
erna
nce.
Prov
ide
form
al g
uida
nce
to in
sure
rs o
n its
exp
ecta
tions
with
rega
rd to
the
rem
uner
atio
n po
licy
for d
irect
ors a
nd se
nior
man
agem
ent.
ICP
10—
Inte
rnal
con
trols
.
Req
uire
loss
rese
rve
spec
ialis
ts to
hav
e a
dire
ct re
porti
ng re
latio
nshi
p to
the
boar
d of
dire
ctor
s.
ICP
12—
Rep
ortin
g to
supe
rvis
ors a
nd
off-
site
mon
itorin
g.
Con
side
r: a)
impr
ovin
g th
e tim
elin
ess o
f rep
ortin
g by
intro
duci
ng q
uarte
rly re
porti
ng fo
cusi
ng o
n ke
y in
dica
tors
, on
unau
dite
d ba
sis;
b) r
equi
ring
insu
rers
to su
bmit
info
rmat
ion
abou
t the
ir fin
anci
al c
ondi
tion
and
perfo
rman
ce o
n bo
th a
solo
and
a g
roup
-wid
e ba
sis;
and
c) c
larif
ying
that
all
insu
rers
mus
t mai
ntai
n pr
oper
boo
ks o
f acc
ount
s in
Ber
mud
a.
ICP1
6—W
indi
ng-u
p or
exi
t fro
m th
e m
arke
t.
Cla
rify
the
prio
rity
of p
olic
yhol
ders
’ cla
ims f
or g
rand
fath
ered
com
posi
te in
sure
rs a
nd in
sure
rs a
llow
ed to
und
erta
ke n
on-in
sura
nce
rela
ted
busi
ness
with
in th
e sa
me
lega
l ent
ity. F
orm
ulat
e a
clea
r pol
icy
stan
ce o
n in
sure
rs’ c
redi
t fac
ilitie
s and
enc
umbr
ance
s of a
sset
s hel
d fo
r the
ben
efit
of p
olic
yhol
ders
.
ICP1
7—G
roup
-wid
e su
perv
isio
n.
Form
ulat
ion
and
impl
emen
tatio
n of
a p
ragm
atic
and
effe
ctiv
e re
gim
e fo
r gro
up su
perv
isio
n.
ICP1
8—R
isk
asse
ssm
ent a
nd
man
agem
ent.
The
BM
A is
adv
ised
to c
onsi
der f
orm
ulat
ing
its re
gula
tory
stan
ce o
n fu
nctio
ns o
utso
urce
d by
an
insu
rer,
incl
udin
g po
wer
s to
insp
ect t
hird
par
ty
serv
ice
prov
ider
s.
ICP1
9—In
sura
nce
activ
ity.
C
lear
er g
uida
nce
on a
dequ
acy
of re
insu
ranc
e ar
rang
emen
ts a
s wel
l as t
reat
men
t of r
eins
uran
ce re
cove
rabl
es.
ICP2
0—Li
abili
ties.
W
ork
clos
ely
with
the
rele
vant
pro
fess
iona
l ass
ocia
tions
to is
sue
guid
ance
on
the
basi
s and
ade
quac
y of
tech
nica
l pro
visi
ons a
nd c
larif
y va
luat
ion
of th
e am
ount
s rec
over
able
und
er re
insu
ranc
e ar
rang
emen
ts.
ICP2
1—In
vest
men
ts.
Es
tabl
ish
clea
r gui
danc
e on
ass
et-li
abili
ty m
anag
emen
t, co
ncen
tratio
n ris
ks a
nd a
sset
val
uatio
n as
par
t of i
ts ri
sk-b
ased
cap
ital f
ram
ewor
k.
ICP2
2—D
eriv
ativ
es a
nd si
mila
r co
mm
itmen
ts.
Esta
blis
h di
sclo
sure
requ
irem
ents
for d
eriv
ativ
es a
nd si
mila
r com
mitm
ents
.
ICP2
6—In
form
atio
n, d
iscl
osur
e an
d tra
nspa
renc
y to
war
ds m
arke
ts.
To fa
cilit
ate
mar
ket d
isci
plin
e, th
e B
MA
shou
ld fo
rmul
ate
plan
s to
impl
emen
t the
IAIS
supe
rvis
ory
stan
dard
s on
publ
ic d
iscl
osur
es.
Authorities’ Response to the Assessment
The Authority is pleased that the IMF Assessment has recognized the effectiveness of the regulatory framework put in place in Bermuda, and the significant work that has been undertaken since the last IMF Review in 2003. At the same time, in anticipation of the new international standards as a result of initiatives such as Solvency II, Bermuda has moved swiftly to even further develop and enhance a number of aspects of its regulatory regime, consistent with the requirements of these new standards. This process is already well advanced, with numerous changes already introduced and others expected to be implemented during the first part of 2009. Certain amendments to the Insurance Act 1978 have been enacted, in particular underpinning the ability of the Authority to clarify aspects of the regulatory requirements and standards through codes of conduct to the industry. Moreover, the Authority has taken a number of steps to further enhance the effectiveness of its insurance regime including: significant increases in qualified technical staff; extending the risk-based model and further enhancement of the on-site elements of the regulatory regime to all classes, including the captives. Through these and other initiatives currently in train, the Authority is confident that it will continue to maintain a high degree of compliance with the relevant international standards. More specifically, the Authority has been in a period of significant growth in staffing resources and has targeted further increases in supervisory and other resources for the remainder of 2008. These efforts have meant we have increased the size of our insurance and banking, trust and investment supervisory teams; have developed an independent risk and policy unit; have set up a dedicated insurance run-off team and have created an in-house actuarial unit. The Authority is making a significant investment in learning & development in its staff with a multi-tier program of core, intermediate, and specialist training, and sponsored study and accreditation. The Authority values maintaining a strong working relationship with its external stakeholders in the various segments of the insurance industry. We will shortly publish a statement of policy on our approach to consultation with industry to set out a transparent framework for engaging with stakeholders on legislative and regulatory change. In our supervisory operations, our increased resources and enhanced on-site risk assessment and solvency frameworks allow the Authority to engage in a challenging dialogue with individual firms. Since the IMF assessment mission, the Authority has made further progress in the roll-out of its supervisory program for insurance, including further on-site assessment, enhanced solvency standards, and specialist risk reviews. Our 2008–09 Business Plan sets out the Authority’s road-map to implement the remaining elements of the framework. The Authority’s existing risk-based framework allows it to assess group governance, controls and risk management arrangements as part of its solo supervisory monitoring. The Authority’s 2008–2009 Business Plan sets out our intention to publish a discussion paper on
33
insurance group supervision in the first quarter of 2009 and to move to implement a group supervision framework by 2011. In the meantime, the Authority is hosting a number of supervisory colleges to facilitate supervisory co-operation on our largest insurance companies. Following the IMF assessment mission, the Authority has introduced a requirement for Class 4 insurance companies to publish their GAAP accounts. The Authority will consult on extending this requirement to the largest Class 3 companies and on further types of disclosure. The Authority is also in the process of reviewing and considering the appropriateness of other risk disclosures to enhance transparency. In addition to building specialist risk capabilities, the Authority required Class 4 insurers to file the new risk-based capital model (Bermuda Capital Solvency Requirement) for the 2007 year-end. The model was accompanied by substantial risk and forward looking disclosures. Class 4 insurers were also required to file prescribed stress and scenario tests. Further, the Authority has designed an in-house system independent of the Bermuda Capital Solvency Requirement to evaluate the robustness of both the capital model and insurers’ ability to sustain catastrophic losses at varying levels. More comprehensive legislation with respect to the risk-based solvency regime was passed in July 2008. The legislation makes provision for the internal models of Class 4 insurers to be approved for the calculation of regulatory capital requirements upon satisfying certain criteria. The legislation also subdivides the existing heterogeneous Class 3 sector into three separate classes (captives, small commercial and large commercial) to enhance the risk-based approach applied to the Authority’s insurance register.
34
ANNEX II: ROSC for the FATF’s Recommendations for AML/CFT
Bermuda: Report on Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
Introduction
53. This report on the Observance of Standards and Codes (ROSC) for the FATF 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations Combating the Financing of Terrorism (CFT) was prepared by the International Monetary Fund (IMF). The report provides a summary of the AML/CFT measures in place in Bermuda, the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The assessment is based on the information available at the time of the mission from May 7–23, 2007 and was conducted using the 2004 Assessment Methodology. The Detailed Assessment Report (DAR) on which this ROSC is based was adopted by the Caribbean Financial Action Task Force (CFATF) on November 23, 2007. The views expressed in this document, as well as in the detailed assessment report (DAR), are those of the IMF mission team27 and do not necessarily reflect the views of the Government of Bermuda or the Executive Board of the IMF.
Key Findings
54. There has not been much change in Bermuda’s AML/CFT regime since the AML legislation and guidance notes (GNs) came into force in 1998, and the last IMF assessment in 2003. Apart from a few changes to the POCA and the GNs, the only significant new legislation enacted was the Anti-Terrorism (Financial and Other Measures) Act 2004 (ATFA). New draft GNs, prepared soon after the last IMF assessment, are still to be finalized and implemented. Therefore, the current AML/CFT regime has not kept pace with changes in the FATF Recommendations, and the authorities have been slow in implementing a number of key recommendations from the last IMF assessment, particularly with respect to the financial and non-financial sectors. At the time of the mission, several pieces of new legislation were under consideration by parliament to address a number of weaknesses in the regime as described below.
55. The lack of sufficient reforms to the AML/CFT regime has also limited Bermuda’s ability to apply risk-sensitive approaches to preventive measures for financial institutions (FIs), as permitted under the FATF Recommendations. In Bermuda’s case, the application of risk-based approaches seems particularly relevant, not only with respect to insurance—which is the most significant sector—but also in other types of financial and non-financial activities. The AML Regulations and GNs contain exemptions or simplified customer due diligence (CDD) provisions, but lower risk has not been proven in all cases. Furthermore, some of the exemptions are clearly inappropriate. Implementation of
27 The mission team comprised Manuel Vazquez, Antonio Hyman Bouchereau (both IMF), Ross Delston, and John Abboth (both consultants).
35
the recently passed legislation (post-mission), proposed regulations, and GNs will address some of the identified weaknesses in the preventive regime and, as contemplated, can provide for a more risk-based approach to compliance and supervision.
Legal Systems and Related Institutional Measures
56. The criminalization of money laundering (ML) and the financing of terrorism (FT) are generally comprehensive, with offenses applying to both natural and legal persons, and to the requisite predicate offenses. However, it is difficult to assess effectiveness of the legal framework given that there has been only one prosecution for ML in the last five years, as well as limited ML investigations. With respect to FT, no criminal investigations relating to terrorist activities, their financing, or the provision of support to them have been referred to the courts in Bermuda and there have been no FT-related suspicious activity reports (SAR) filed.
57. Under current law, protections from civil liability, but not explicitly from criminal liability, apply only to those who file ML-related SARs. In addition, regulated institutions who file FT-related SARs are not explicitly protected from either civil or criminal liability. The tipping-off offense is narrowly focused on investigations, rather than explicitly prohibiting disclosures relating to a SAR being filed or the contents of the SAR.
58. The legal framework for investigation and prosecution of ML is well-developed, and law enforcement and prosecutorial staff are highly motivated and professional. However, the staffing constraints in the office of the Director of Public Prosecutions (DPP) and the Financial Intelligence Unit (FIU) may have contributed to a low number of ML investigations, limiting their ability to carry out their AML/CFT tasks effectively. In practice, only a small number of SARs that are analyzed are fully investigated.
59. Following Parliament’s recent enactment of the Financial Intelligence Agency Act 2007 (the FIA Act which is still to be put into effect), a new administrative agency (the FIA) is in the process of being organized to take on the responsibilities of the current FIU that is part of the Bermuda police. To prevent an interruption in transfer of responsibilities, the BMA should provide for a suitable period of transition where the FIU remains tasked with financial intelligence functions until the FIA is fully operational. All police officers within the FIU have training in basic financial investigations, and most have been trained in areas such as confiscations, money laundering, and advanced financial investigative techniques. However, the current volume of work impacts the effectiveness of the FIU in undertaking timely analysis and investigations. In this regard, the FIU should be sufficiently staffed and provided with additional technical resources—including expertise in forensic accounting—during the transitional period to avoid operational gaps and to efficiently manage the transfer of the intelligence-related tasks to the FIA.
60. At the time of the mission, three important draft laws were under consideration that were enacted in June 2007. These are amendments to the POCA, the Criminal Justice
36
International Cooperation (Bermuda Act), and the FIA Act. Once implemented, these new laws will address a number of the weaknesses in the AML/CFT legal framework identified by the mission.
Preventive Measures—Financial Institutions
61. The scope of the AML regulatory framework does not address CFT issues, and does not cover key areas of the financial sector, including life insurance business and certain elements of the investment/mutual funds sector. The lack of coverage in these areas constitutes an important deficiency in Bermuda’s AML/CFT regime, particularly in light of its role in the international financial system, even though life insurance does not account for the largest share of this sector. The POCA Regulations and GNs remain practically unchanged since the last IMF assessment mission in 2003, despite the weaknesses previously identified, a major upgrade of the international AML/CFT standards in 2003, and continued growth in the financial services industry. At the time of the mission, the BMA had prepared draft new regulations and was contemplating amending the GNs, pending passage of proposed new legislation that was to be passed subsequent to the mission.
62. The regulatory framework for FIs lacks basic CDD requirements, and risk-based approaches to compliance and supervision are underdeveloped. CDD requirements are narrowly focused on customer identification, and there are no provisions for complying with key CFT recommendations such as those for wire transfers. These and other deficiencies do not facilitate effective implementation, supervision, and enforcement. In addition, the GNs (which are non-enforceable) do not provide sufficient guidance for purposes of implementing broad-based CDD, and contain a number of customer identification provisions that could be detrimental to compliance. A key challenge also lies in the ability of FIs headquartered in Bermuda to implement and monitor their global operations. Increased attention should be given to the management of cross-border ML and FT risks, especially those associated with business relationships and transactions introduced through local and foreign intermediaries. In addition, compliance with recordkeeping requirements can be strengthened, including for beneficiary clients and business relationships established before the AML/CFT legislation was introduced.
63. A key strength of Bermuda’s supervisory regime is the integrated nature of financial sector supervision by the BMA and the professionalism of its staff. The BMA has a relatively strict licensing regime, which has contributed to the stability of its financial sector. Nonetheless, AML/CFT supervision is still developing particularly with respect to on-site inspections. While the BMA continues to improve its supervisory systems and processes, enhanced capacity, skills, and resources are required to strengthen AML/CFT supervision, particularly on-site inspections in key industries, namely the insurance and investments services sectors. The BMA also faces practical constraints in its ability to effectively conduct ongoing consolidated AML/CFT supervision, especially in the insurance sector and on a cross-border basis. This will require careful resource management and increased collaboration with other key players such as external auditors and overseas regulators. The conduct of sector-specific ML and FT risk assessments should be considered to better
37
manage the supervisory process, identify supervisory priorities, and more efficiently allocate resources.
64. There is good cooperation between the BMA and the financial sectors, but the absence of specific sanctions for AML/CFT breaches limits the effectiveness of the BMA’s compliance oversight regime. To this end, more focused risk-based AML/CFT inspections should be conducted and, where necessary, enforcement action taken. The BMA has started to develop more broad-based on-site supervisory programs, which should be expedited across all sectors. Following a risk-based approach, the BMA should enhance the focus of its on-site procedures to reviewing compliance with CDD requirements for beneficial customers, including more rigorous enforcement of such requirements for accounts in existence when the AML regime was introduced in 1998.
65. The BMA has a wide array of formal sanctioning powers available to it but has never imposed them against a FI for a deficiency or violation of AML/CFT requirements. The practice has been for the BMA to apply moral suasion and less formal approaches to enforcement of compliance with these and other requirements, generally through the issue of warning letters, and these have been used only in a few cases.
D. Preventive Measures—Designated Non-Financial Businesses and Professions (DNFBP)
66. A comprehensive AML/CFT framework for DNFBPs was only beginning to be put in place at the time of the mission. Only trust service providers were subject to AML/CFT preventive measures including for monitoring compliance with these requirements. Other relevant DNFBPs are subject to the general requirement to report suspicious activities that applies to all citizens in the course of their business or profession. However, in the absence of an effective system of preventive measures and compliance oversight, these requirements are not being effectively implemented. It is rare that DNFBPs, other than trust services businesses, file SARs even though, as mentioned above, there is a general obligation on all persons to report.
67. The ML and FT vulnerabilities related to activities of lawyers, accountants, trust service providers, and company service providers have not been closely analyzed, although they are key gateways to the highly sophisticated and internationally active financial sector of Bermuda. Although there is little analysis to back this up, the risks of ML and FT through these sectors are generally perceived by the professions to be low. Regulation and supervision of the trust service business (TSB) mitigate against these risks in trust operations. In addition, relatively strict requirements and procedures for the incorporation of Bermudian companies also reduce the potential for ML and FT in this sector.
68. Local drug traffickers utilize the proceeds of drug trafficking to facilitate further drug shipments, as well as to acquire assets. Investigations related to possible confiscation orders frequently find that drug traffickers have used their proceeds to invest in local property, generally at the lower to middle end of the market, and frequently through the use of nominees. Car purchases are also a common use of the proceeds of drug trafficking.
38
Access by nonresidents to the Bermuda property market is tightly restricted which may limit the attractiveness of this sector for international money launderers.
69. Plans are well-advanced to bring lawyers and accountants in public practice, as well as corporate service providers, within the AML/CFT preventive regime, but supervisory arrangements are not yet agreed. These plans include amendments to the POCA that were enacted by the legislature subsequent to the mission, and draft amendments to the POC Regulations which should include lawyers and accountants under the preventive regime. The provisions being adopted fall short of FATF standards in several respects, particularly in regard to the scope of activities of lawyers and accountants that would be subject to AML/CFT requirements. The scope of activities of lawyers and accountants that are subject to AML/CFT preventive measures is narrower than called for under the FATF Recommendations.
Legal Persons and Arrangements & Non-Profit Organizations (NPOs)
70. Bermuda is not a significant jurisdiction for the incorporation of companies, and there are a range of controls to mitigate the risk that legal entities and trust arrangements will be misused for illicit purposes. Incorporation of Bermuda companies requires that ultimate beneficial ownership be established twice before registration is accepted; once by the party submitting the application (who would normally be a lawyer), and again independently by the authorities. Companies are required to maintain a register of shareholders that is accessible to the public. With respect to trusts, any person offering trust services as a business is required to be licensed and supervised by the BMA as an FI. TSBs are required to establish the identity of parties to a trust relationship including settlors and ultimate beneficiaries. Law enforcement can gain full access to such CDD information and can share it with foreign authorities.
71. Ongoing oversight of charities is light but compliance with legal requirements appears to be good. In the NPO sector, charities are required to register if they are to raise money from the public. Most funds raised in Bermuda are applied in Bermuda and the vulnerability of the sector to ML and FT appears to be low. However, no risk assessment has been undertaken and AML/CFT is not a focus in the oversight of the charities sector.
National and International Co-operation
72. Bermuda has a comprehensive legal and institutional framework for international cooperation that is largely consistent with international standards, but there is a lack of conventional national cooperation mechanisms among governmental institutions on AML/CFT. The National Anti-Money Laundering Committee (NAMLC) brings together key ministries and departments, and fills in practice, the AML/CFT policy formulation role in Bermuda. NAMLC’s main legal mandate is, however, to advise the MOF and to issue industry guidance on AML issues, not to coordinate the formulation and implementation of AML/CFT policy. This situation may have contributed to the slow pace of legal and institutional reforms since the last IMF assessment in 2003.
39
E. Other Issues
73. The Suppression of the Financing of Terrorism (SFT) and Palermo Conventions have not been extended to Bermuda by the U.K. While this is not entirely within the power of Bermuda to address, it is a situation that should be remedied without delay.
74. Bermuda does not have a declaration or disclosure system in place for the physical cross-border transportation of cash and bearer instruments. While the authorities have plans to implement such a system, it should, inter alia, provide for the declaration of both incoming and outgoing transfers.
40
Tabl
e 6.
Sum
mar
y Ta
ble
of O
bser
vanc
e an
d K
ey R
ecom
men
datio
ns28
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
I. L
egal
Sys
tem
and
Rel
ated
Inst
itutio
nal M
easu
res
Crim
inal
izat
ion
of M
oney
Lau
nder
ing
R.1
LC
R. 2
LC
• In
crea
se in
vest
igat
ions
and
pro
secu
tions
in o
rder
to m
aint
ain
an e
ffect
ive
AM
L/C
FT fr
amew
ork,
par
ticul
arly
giv
en th
at th
ere
has o
nly
been
one
pro
secu
tion
of M
L in
the
last
five
yea
rs a
nd li
mite
d nu
mbe
rs o
f ML
inve
stig
atio
ns.
• Fi
nes u
nder
PO
CA
with
resp
ect t
o su
mm
ary
conv
ictio
ns a
nd c
erta
in c
onvi
ctio
ns o
n in
dict
men
t sho
uld
be su
bsta
ntia
lly in
crea
sed.
Crim
inal
izat
ion
of T
erro
rist F
inan
cing
SR.II
PC
• A
men
d th
e A
TFA
’s d
efin
ition
of t
erro
rism
to in
clud
e/co
ver (
i) th
e ac
ts c
over
ed b
y th
e ni
ne c
onve
ntio
ns re
ferr
ed to
in th
e SF
T C
onve
ntio
n; (i
i) ac
ts ta
ken
agai
nst
inte
rnat
iona
l org
aniz
atio
ns; (
iii) a
refe
renc
e to
the
finan
cing
of t
erro
rist
orga
niza
tions
; and
(iv)
ext
ra-te
rrito
rial a
cts r
elat
ing
to te
rror
ist o
rgan
izat
ions
.
Con
fisca
tion,
free
zing
, and
seiz
ing
of p
roce
eds o
f crim
e
R.3
PC
• Ex
plic
itly
prov
ide
in le
gisl
atio
n th
at, f
or th
e pu
rpos
es o
f con
fisca
tion
of th
e be
nefit
s of
ML
offe
nses
, the
pro
ceed
s tha
t are
the
basi
s of t
he o
ffens
e m
ay in
clud
e an
y pa
ymen
ts re
ceiv
ed b
y th
e de
fend
ant a
t any
tim
e in
con
nect
ion
with
the
ML
offe
nse
carr
ied
out b
y hi
m o
r by
anot
her p
erso
n.
• W
ith re
spec
t to
the
void
ing
of c
ontra
cts,
expl
icitl
y pr
ovid
e th
e au
thor
ities
with
the
mea
ns to
pre
vent
act
ions
to h
inde
r the
reco
very
of p
rope
rty su
bjec
t to
conf
isca
tion.
Free
zing
of f
unds
use
d fo
r ter
roris
t fin
anci
ng
SR.II
I PC
• Is
sue
guid
ance
to th
e fin
anci
al se
rvic
es c
omm
unity
con
cern
ing
affir
mat
ive
oblig
atio
ns to
free
ze a
sset
s of p
erso
ns li
sted
by
the
UN
SCR
126
7 C
omm
ittee
and
th
e EU
.
• D
evel
op a
nd p
ublis
h pr
oced
ures
for d
elis
ting
requ
ests
and
the
unfr
eezi
ng o
f fun
ds
asso
ciat
ed w
ith F
T.
The
Fina
ncia
l Int
ellig
ence
Uni
t and
its f
unct
ions
R.2
6 LC
• Th
e ne
w F
IA sh
ould
be
esta
blis
hed
and
mad
e op
erat
iona
l, an
d pr
ovid
ed w
ith
suff
icie
nt st
aff t
o en
able
an
incr
ease
d nu
mbe
r of M
L/FT
-rel
ated
inve
stig
atio
ns.
• M
aint
ain
the
leve
l of e
xper
ienc
e an
d sk
ills i
n fin
anci
al in
vest
igat
ions
uni
t of t
he
28
Mor
e co
mpr
ehen
sive
reco
mm
enda
tions
are
pro
vide
d in
the
DA
R.
41
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
Com
mer
cial
Crim
e D
epar
tmen
t.
Law
enf
orce
men
t, pr
osec
utio
n an
d ot
her c
ompe
tent
aut
horit
ies
R. 2
7
LC
R.2
8
C
• In
vest
igat
ing
and
pros
ecut
ing
ML/
FT c
ases
shou
ld b
e m
ade
a hi
gher
prio
rity
by la
w
enfo
rcem
ent a
utho
ritie
s, w
ith su
ffic
ient
reso
urce
s allo
cate
d re
flect
ing
that
prio
rity.
Cro
ss B
orde
r Dec
lara
tion
or d
iscl
osur
e
SR IX
N
C
• Im
plem
ent t
he c
urre
ncy
decl
arat
ion
syst
em n
ow b
eing
con
side
red
by th
e au
thor
ities
to
incl
ude
both
out
goin
g an
d no
t jus
t inc
omin
g tra
nspo
rtatio
n of
cur
renc
y as
cu
rren
tly p
lann
ed;
• Su
bsta
ntia
lly in
crea
se th
e sc
ale
of c
ivil
mon
ey fi
nes a
nd c
rimin
al p
enal
ties f
or
cust
oms v
iola
tions
;
• En
sure
suff
icie
nt in
form
atio
n-sh
arin
g be
twee
n C
usto
ms a
nd o
ther
law
enf
orce
men
t au
thor
ities
;
• C
onsi
der:
(i) g
rant
ing
the
Cus
tom
s Dep
artm
ent w
ith e
xplic
it le
gal a
utho
rity
to
seiz
e, d
etai
n, a
nd c
onfis
cate
cur
renc
y in
the
even
t of a
fals
e de
clar
atio
n; a
nd (i
i) de
velo
ping
a p
roce
dure
to n
otify
oth
er c
usto
ms a
genc
ies o
f sea
rch
and
dete
ntio
n re
ports
rela
ting
to p
reci
ous m
etal
s and
ston
es o
ther
than
gol
d.
2. P
reve
ntiv
e M
easu
res:
Fin
anci
al In
stitu
tions
Ris
k of
mon
ey la
unde
ring
or te
rror
ist f
inan
cing
•
Con
duct
a s
yste
mic
revi
ew o
f ML
and
FT ri
sks,
parti
cula
rly in
the
finan
cial
and
D
NFB
P se
ctor
s, in
clud
ing
in th
e lif
e, a
nnui
ty/in
vest
men
t, an
d ca
ptiv
e co
mpo
nent
s of
the
insu
ranc
e se
ctor
.
Cus
tom
er d
ue d
ilige
nce,
incl
udin
g en
hanc
ed o
r red
uced
mea
sure
s
R.5
N
C
R.6
N
C
R.7
N
C
R.8
N
C
• Ex
tend
the
AM
L/C
FT re
quire
men
ts to
key
sect
ors o
f the
eco
nom
y in
clud
ing
life
insu
ranc
e bu
sine
ss a
nd e
xpan
d its
cov
erag
e in
the
inve
stm
ents
(mut
ual f
unds
) se
ctor
.
• Ex
tend
the
CD
D re
quire
men
ts b
eyon
d cu
stom
er id
entif
icat
ion,
exp
licitl
y co
ver C
FT
issu
es, a
nd re
duce
the
CD
D th
resh
old
for w
ire tr
ansf
ers t
o U
S/B
D$1
,000
.
• R
equi
re F
Is to
con
duct
enh
ance
d C
DD
and
mon
itorin
g fo
r hig
her r
isk
busi
ness
(in
clud
ing
for p
oliti
cally
exp
osed
per
sons
and
resp
onde
nt b
anks
) and
requ
ire
regu
lar u
pdat
ing
of C
DD
info
rmat
ion.
• R
equi
re F
Is to
add
ress
risk
s ass
ocia
ted
with
non
-face
-to-fa
ce b
usin
ess r
elat
ions
hips
42
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
or tr
ansa
ctio
ns, a
nd to
impl
emen
t mea
sure
s to
prev
ent m
isus
e of
tech
nolo
gica
l de
velo
pmen
ts th
at c
ould
faci
litat
e M
L/FT
.
Third
par
ties a
nd in
trodu
ced
busi
ness
R.9
N
C
• En
hanc
e C
DD
and
doc
umen
tatio
n re
quire
men
ts fo
r FIs
whe
n re
lyin
g on
third
pa
rties
, par
ticul
arly
whe
n th
ey a
re b
ased
in o
ther
cou
ntrie
s.
Fina
ncia
l ins
titut
ion
secr
ecy
or c
onfid
entia
lity
R.4
N
C
• C
onsi
der a
men
ding
the
five
regu
lato
ry a
cts a
nd th
e B
MA
Act
to p
rovi
de g
atew
ays
for d
iscl
osur
es to
the
FIA
.
Rec
ord
keep
ing
and
wire
tran
sfer
rule
s
R.1
0
LC
SR.V
II
NC
• Ex
plic
itly
incl
ude
AM
L/C
FT re
cord
keep
ing
requ
irem
ents
in th
e re
gula
tory
law
s an
d re
quire
in th
e G
uida
nce
Not
es th
e ne
ed to
reta
in tr
ansa
ctio
n re
cord
s bey
ond
deta
ils o
f sec
uriti
es a
nd in
vest
men
ts tr
ansa
ctio
ns.
• R
educ
e th
e m
inim
um re
cord
keep
ing
thre
shol
d fo
r wire
tran
sfer
s to
the
equi
vale
nt o
f U
S$1,
000,
and
requ
ire th
at fu
ll or
igin
ator
info
rmat
ion
be o
btai
ned
and
reta
ined
for
the
min
imum
per
iod
in a
ccor
danc
e w
ith S
R V
II.
• In
clud
e la
ck o
f com
plet
e or
igin
ator
info
rmat
ion
as a
bas
is fo
r det
erm
inin
g w
heth
er
a su
spic
ious
act
ivity
repo
rt is
file
d w
ith th
e FI
U.
Mon
itorin
g of
tran
sact
ions
and
rela
tions
hips
R.1
1
NC
R.2
1 N
C
• R
equi
re F
Is to
mon
itor a
nd re
cord
info
rmat
ion
on c
ompl
ex, u
nusu
ally
larg
e, o
r un
usua
l pat
tern
s of t
rans
actio
ns th
at h
ave
no a
ppar
ent e
cono
mic
or l
awfu
l pur
pose
.
• R
equi
re F
Is to
pay
spec
ial a
ttent
ion
to re
latio
nshi
ps/tr
ansa
ctio
ns w
ith p
erso
ns fr
om
coun
tries
that
whi
ch d
o no
t suf
ficie
ntly
app
ly th
e FA
TF R
ecom
men
datio
ns.
Susp
icio
us tr
ansa
ctio
n re
ports
and
oth
er re
porti
ng
R.1
3 PC
R.1
4 PC
R.1
9
C
R.2
5
PC
• Ex
tend
exp
licit
prot
ectio
n ag
ains
t crim
inal
liab
ility
for f
iling
SA
Rs.
• Ex
tend
the
“tip
ping
-off
” of
fens
e to
exp
licitl
y co
ver a
ny in
form
atio
n ab
out a
SA
R
filin
g an
d th
e co
nten
ts, a
nd li
mit
the
scop
e of
the
exem
ptio
n gr
ante
d to
law
yers
.
• D
evel
op g
uida
nce
for F
Is a
nd D
NFB
P re
latin
g to
late
st in
dust
ry-s
peci
fic ty
polo
gies
an
d ad
ditio
nal p
reve
ntiv
e m
easu
res.
43
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
SR.IV
PC
Inte
rnal
con
trols
, com
plia
nce,
aud
it an
d fo
reig
n br
anch
es
R.1
5 PC
R. 2
2 N
C
• Ex
plic
itly
requ
ire F
Is to
impl
emen
t com
preh
ensi
ve A
ML/
CFT
pol
icie
s, pr
oced
ures
, an
d co
ntro
ls, i
nclu
ding
for t
he fu
ll ra
nge
CD
D a
nd re
cord
keep
ing
requ
irem
ents
(S
ee R
. 5 a
nd R
. 10)
.
• Ex
pand
the
role
of t
he A
ML/
CFT
com
plia
nce
func
tion
beyo
nd su
spic
ious
act
ivity
re
porti
ng a
nd re
quire
inte
rnal
aud
it to
cov
er A
ML/
CFT
issu
es.
• Ex
pand
the
scop
e of
the
staf
f tra
inin
g re
quire
men
ts a
nd in
clud
e em
ploy
ee sc
reen
ing
requ
irem
ents
for A
ML/
CFT
pur
pose
s.
• R
equi
re im
plem
enta
tion
of A
ML/
CFT
mea
sure
s in
over
seas
bra
nche
s and
su
bsid
iarie
s, in
clud
ing
the
need
to in
form
the
Ber
mud
ian
auth
oriti
es w
hen
thei
r ov
erse
as o
pera
tions
can
not o
bser
ve a
ppro
pria
te A
ML/
CFT
mea
sure
s in
the
host
co
untri
es.
Shel
l ban
ks
R.1
8 LC
• In
trodu
ce a
n ex
plic
it pr
ohib
ition
on
the
licen
sing
of s
hell
bank
s and
exp
licitl
y re
quire
ban
king
ent
ities
to m
aint
ain
a si
gnifi
cant
pre
senc
e in
Ber
mud
a.
Supe
rvis
ory
and
over
sigh
t sys
tem
–com
pete
nt a
utho
ritie
s and
SR
Os
R. 1
7 PC
R.2
3
NC
R.2
5
PC
• En
act l
egis
latio
n fo
r civ
il m
oney
pen
altie
s and
con
serv
ator
ship
pow
ers t
o be
ap
plie
d by
the
BM
A, a
nd in
crea
se fi
nes w
ith re
spec
t to
sum
mar
y co
nvic
tions
and
ce
rtain
con
vict
ions
on
indi
ctm
ent.
• R
evie
w th
e ef
fect
iven
ess o
f enf
orce
men
t and
sanc
tioni
ng p
ract
ice
for A
ML/
CFT
.
• Im
plem
ent c
ompr
ehen
sive
risk
-bas
ed A
ML/
CFT
off
-site
and
on-
site
supe
rvis
ion
proc
esse
s, in
clud
ing
on a
con
solid
ated
bas
is a
cros
s all
sect
ors.
• En
hanc
e th
e on
-site
revi
ew o
f the
suffi
cien
cy a
nd q
ualit
y of
SA
R re
porti
ng s
yste
ms,
and
cons
ider
exp
andi
ng th
e ro
le o
f ext
erna
l aud
itors
for A
ML/
CFT
pur
pose
s.
• Ex
pedi
te th
e lic
ensi
ng/re
gist
ratio
n pr
oces
s for
mon
ey se
rvic
es fi
rm(s
) and
revi
ew
regu
lato
ry p
rovi
sion
s for
age
nts/
suba
gent
s of r
emitt
ance
firm
s.
• C
ondu
ct a
sys
tem
ic re
view
to a
scer
tain
the
exis
tenc
e of
fina
ncia
l act
iviti
es c
over
ed
by th
e FA
TF R
ecom
men
datio
ns n
ot su
bjec
t to
the
curr
ent A
ML/
CFT
regi
me,
e.g
. le
asin
g op
erat
ions
.
• U
pdat
e th
e G
Ns f
or re
leva
nce
to th
e FA
TF R
ecom
men
datio
ns a
nd th
e cu
rren
t nee
ds
44
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
of in
dust
ry.
• Es
tabl
ish
an e
xplic
it m
anda
te fo
r the
BM
A to
mon
itor,
enfo
rce
and
sanc
tion
for
com
plia
nce
with
the
AM
L/C
FT le
gal o
blig
atio
ns.
Mon
ey v
alue
tran
sfer
serv
ices
SR.V
I PC
• R
equi
re m
oney
tran
sfer
serv
ices
, whe
n lic
ense
d, to
mai
ntai
n a
list o
f the
ir ag
ents
.
3. P
reve
ntiv
e M
easu
res:
Non
finan
cial
Bus
ines
s and
Pro
fess
ions
Cus
tom
er d
ue d
ilige
nce
and
reco
rd-k
eepi
ng
R.1
2 N
C
• R
equi
re la
wye
rs, a
ccou
ntan
ts, c
ompa
ny se
rvic
e pr
ovid
ers,
deal
ers i
n pr
ecio
us
met
als a
nd st
ones
incl
udin
g je
wel
ers,
and
real
est
ate
agen
ts to
impl
emen
t ap
prop
riate
AM
L/C
FT p
rogr
ams c
onsi
sten
t with
the
FATF
Rec
omm
enda
tions
.
• Pr
ovid
e ad
equa
te p
ower
s for
the
desi
gnat
ed su
perv
isor
to re
view
and
enf
orce
A
ML/
CFT
requ
irem
ents
for D
NFB
Ps ir
resp
ectiv
e of
any
SR
O a
rran
gem
ents
.
• Fa
mili
ariz
e D
NFB
Ps w
ith th
eir r
espo
nsib
ilitie
s and
obl
igat
ions
und
er p
ropo
sed
new
A
ML/
CFT
law
s and
regu
latio
ns.
Susp
icio
us tr
ansa
ctio
n re
porti
ng
R.1
6 N
C
• En
sure
that
the
SAR
repo
rting
requ
irem
ent c
onfo
rms t
o th
e ap
plic
able
FA
TF
Rec
omm
enda
tions
., in
clud
ing
for l
egal
pro
fess
iona
ls.
• R
evis
e re
leva
nt le
gisl
atio
n w
ith re
spec
t to
tippi
ng o
ff p
rohi
bitio
ns fo
r law
yers
, in
orde
r to
prot
ect t
he c
onfid
entia
lity
of S
AR
info
rmat
ion.
• A
pply
the
prev
entiv
e m
easu
res u
nder
the
FATF
Rec
omm
enda
tions
. to
DN
FBPs
in
clud
ing
the
need
to h
ave
polic
ies,
proc
edur
es, a
nd c
ontro
ls to
mon
itor a
nd re
port
susp
icio
us tr
ansa
ctio
ns.
Reg
ulat
ion,
supe
rvis
ion,
mon
itorin
g, a
nd sa
nctio
ns
R.2
4 N
C
R.2
5 PC
• Im
plem
ent e
ffect
ive
supe
rvis
ory
arra
ngem
ents
for D
NFB
Ps, i
nclu
ding
pow
ers f
or
the
supe
rvis
ors t
o m
onito
r and
sanc
tion,
and
ade
quat
e re
sour
ces t
o ca
rry
out t
he
supe
rvis
ory
func
tion.
• In
trodu
ce u
pdat
ed g
uida
nce
for a
ll D
NFB
Ps.
45
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
Oth
er d
esig
nate
d no
nfin
anci
al b
usin
esse
s and
pro
fess
ions
N
one.
R.2
0 C
•
Req
uire
mon
ey tr
ansf
er se
rvic
es, w
hen
licen
sed,
to m
aint
ain
a lis
t of t
heir
agen
ts.
4. L
egal
Per
sons
and
Arr
ange
men
ts a
nd N
onpr
ofit
Org
aniz
atio
ns
Lega
l Per
sons
–Acc
ess t
o be
nefic
ial o
wne
rshi
p an
d co
ntro
l in
form
atio
n
R.3
3 C
Non
e.
Lega
l Arr
ange
men
ts–A
cces
s to
bene
ficia
l ow
ners
hip
and
cont
rol
info
rmat
ion
R. 3
4 C
Non
e.
Non
prof
it or
gani
zatio
ns
SR.V
III
PC
• R
evie
w a
pplic
able
law
s and
regu
latio
ns re
late
d to
NPO
s to
help
pre
vent
thei
r use
fo
r fin
anci
ng o
f ter
roris
m.
• Es
tabl
ish
reco
rdke
epin
g re
quire
men
ts fo
r NPO
s in
line
with
SR
VII
I 3.4
.
• Im
plem
ent m
easu
res t
o en
able
effe
ctiv
e in
vest
igat
ion
and
acce
ss to
info
rmat
ion
on
NPO
s, as
cal
led
for i
n SR
VII
I.4
5. N
atio
nal a
nd In
tern
atio
nal C
oope
ratio
n
Nat
iona
l coo
pera
tion
and
coor
dina
tion
R.3
1
PC
• A
ppoi
nt a
nat
iona
l AM
L/C
FT c
oord
inat
or a
nd e
nerg
ize
the
polic
y de
velo
pmen
t rol
e of
the
NA
MLC
.
• D
evel
op a
nd im
plem
ent s
yste
mat
ic m
echa
nism
s for
coo
rdin
atio
n am
ong
and
betw
een
all t
he re
leva
nt A
ML/
CFT
age
ncie
s and
dep
artm
ents
.
The
Con
vent
ions
and
UN
SC R
esol
utio
ns
R.3
5 PC
SR.I
PC
• R
eque
st th
at th
e U
.K. e
xten
ds th
e SF
T an
d Pa
lerm
o C
onve
ntio
ns to
Ber
mud
a.
46
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
Mut
ual L
egal
Ass
ista
nce
R.3
6
LC
R.3
7 C
R.3
8
LC
SR.V
C
• A
men
d th
e re
leva
nt st
atut
e(s)
to p
rovi
de fo
r ext
erna
l con
fisca
tion
requ
ests
rela
ting
to in
stru
men
talit
ies u
sed
in a
com
mis
sion
of a
n M
L, F
T, o
r oth
er p
redi
cate
offe
nses
.
• A
rran
gem
ents
for c
oord
inat
ing
seiz
ure
and
conf
isca
tion
actio
ns w
ith o
ther
cou
ntrie
s sh
ould
be
form
aliz
ed.
• Im
prov
e co
llect
ion
of in
form
atio
n on
mut
ual l
egal
ass
ista
nce
and
inte
rnat
iona
l re
ques
ts fo
r co-
oper
atio
n.
Extra
ditio
n
R.3
9 LC
R.3
7 C
• C
onsi
der d
evel
opin
g pr
oced
ures
faci
litat
ing
expe
ditio
us a
ctio
n be
take
n or
es
tabl
ishi
ng p
reci
se ti
mel
ines
for r
espo
nse
to M
LA re
ques
ts, i
nclu
ding
for
extra
ditio
n.
• R
evie
w re
sour
ces a
vaila
ble
at A
GC
and
Pol
ice/
FIU
to e
nsur
e th
at M
LA re
ques
ts
are
acte
d up
on in
as e
ffic
ient
a m
anne
r as p
ossi
ble.
• Im
prov
e co
llect
ion
of in
form
atio
n on
ext
radi
tion
requ
ests
.
Oth
er F
orm
s of C
oope
ratio
n
R.4
0 C
• Im
prov
e co
llect
ion
of d
ata
on fo
rmal
requ
ests
to th
e FI
U fo
r ass
ista
nce,
incl
udin
g ty
pe o
f req
uest
and
whe
ther
such
ass
ista
nce
was
gra
nted
.
• C
onsi
der d
evel
opin
g pr
oced
ures
or p
reci
se g
uide
lines
to fa
cilit
ate
expe
ditio
us
resp
onse
s to
requ
ests
for c
oope
ratio
n.
6. O
ther
Issu
es
Res
ourc
es a
nd S
tatis
tics
R.3
0 PC
R.3
2 PC
• In
crea
se tr
aini
ng fo
r all
agen
cies
and
at a
ll le
vels
, inc
ludi
ng ty
polo
gies
, ana
lysi
s and
in
tern
atio
nal s
tand
ards
, as w
ell a
s in
fund
amen
tals
such
as i
nves
tigat
ing
and
pros
ecut
ing
whi
te c
olla
r crim
e ca
ses,
man
agin
g co
mpl
ex c
ases
, and
crim
inal
pr
oced
ure.
• Es
tabl
ish
the
FIA
with
ade
quat
e fu
ndin
g, st
aff a
nd te
chni
cal r
esou
rces
, par
ticul
arly
in
term
s of a
naly
tical
exp
ertis
e su
ch a
s for
ensi
c ac
coun
ting/
audi
ting.
• En
hanc
e tra
inin
g fo
r BM
A st
aff t
o fa
cilit
ate
the
iden
tific
atio
n of
def
icie
ncie
s re
latin
g to
AM
L/C
FT re
quire
men
ts fo
r FIs
, inc
ludi
ng, b
ut n
ot li
mite
d to
inte
rnal
co
ntro
ls, C
DD
, SA
Rs f
iling
s, re
cord
keep
ing,
MLR
O q
ualif
icat
ions
. and
ope
ratio
ns.
47
FATF
40+
9 R
ecom
men
datio
ns 1
/ K
ey A
sses
sor R
ecom
men
datio
ns
Incr
ease
d sp
ecia
lizat
ion
and
focu
s on
AM
L/C
FT su
perv
isio
n in
the
insu
ranc
e an
d m
utua
l fun
d se
ctor
s sho
uld
be g
iven
prio
rity.
• Th
e B
MA
shou
ld e
nhan
ce it
s sta
ff c
apac
ity to
und
erta
ke m
ore
com
preh
ensi
ve
AM
L/C
FT su
perv
isio
n, in
clud
ing
for t
he c
ondu
ct o
f effe
ctiv
e co
nsol
idat
ed
supe
rvis
ion
whe
ther
as h
ome
or h
ost s
uper
viso
r.
• In
tegr
ate
use
of a
vaila
ble
stat
istic
s and
info
rmat
ion
in re
view
ing
the
effe
ctiv
enes
s of
AM
L/C
FT sy
stem
s on
a re
gula
r bas
is.
1/ C
ompl
iant
(C):
the
Rec
omm
enda
tion
is fu
lly o
bser
ved
with
resp
ect t
o al
l ess
entia
l crit
eria
. L
arge
ly c
ompl
iant
(LC
): th
ere
are
only
min
or sh
ortc
omin
gs, w
ith a
larg
e m
ajor
ity o
f the
ess
entia
l crit
eria
bei
ng fu
lly m
et.
Part
ially
com
plia
nt (P
C):
the
coun
try h
as ta
ken
som
e su
bsta
ntiv
e ac
tion
and
com
plie
s with
som
e of
the
esse
ntia
l crit
eria
. N
on-c
ompl
iant
(NC
): th
ere
are
maj
or sh
ortc
omin
gs, w
ith a
larg
e m
ajor
ity o
f the
ess
entia
l crit
eria
not
bei
ng m
et.
Not
app
licab
le (N
A):
a re
quire
men
t or p
art o
f a re
quire
men
t doe
s not
app
ly, d
ue to
the
stru
ctur
al, l
egal
or i
nstit
utio
nal f
eatu
res o
f a c
ount
ry.
48
Authorities’ Response
The Government of Bermuda is committed to completing the process of updating Bermuda’s AML/CFT regime to reflect the most recent developments in financial crime and the revised international standards from the FATF.
Accordingly, the Bermuda authorities welcome the IMF assessment and would like to thank the assessors for their professionalism and diligence throughout the mission. We note the assessors’ full recognition of both the robustness of the arrangements developed and applied in Bermuda over many years, and of the very substantial steps already taken by the authorities to further develop our regimes to reflect the revised FATF recommendations.
Bermuda has long had a reputation as one of the world’s premier centers for international business and financial services, and our regulation, business practices and legal framework have long provided significant impediments to illicit, unethical, and sharp business dealings.
Equally, the authorities recognize the need to enhance and accelerate Bermuda’s current efforts to strengthen the existing AML/CFT regime including the visible reflection of the standards in business systems and processes in the financial sector. The government intends to use the recommendations arising from the report to provide a roadmap for the various enhancements to the AML/CFT regime in Bermuda in both the public and private sectors. Some of the required changes are already in place and many are at an advanced stage of implementation. Still others are currently the subject of further consultation among those concerned, both in the public and private sectors, as we move through the ‘to do’ list in a risk-prioritized manner. It may be helpful to highlight just a few of the important changes on which the Bermuda authorities have been focusing during 2007:
(1) Three important laws were approved by the Bermuda Legislature in June 2007. These related to amendments to the POCA, the Criminal Justice International Cooperation Act, and a new FIA Act, providing for the establishment of a new autonomous administrative body that will function as a clearing house for SARs. Implementation and effective application of this new legislation will address a number of the specific recommendations made by the assessors for enhancement of our AML/CFT legal framework;
(2) Revised regulations under the POCA were already at an advanced stage of development at the time of the assessment visit. These modified regulations were intended to implement the significant number of aspects of the revised FATF Recommendations which are required to be undertaken by financial institutions and Designated Non-Financial Businesses and Professions through legislation or other enforceable means. Currently these regulations are being further enhanced with a view to achieving an even greater measure of compliance with the final assessors’ recommendations;
(3) Authorities have approved the establishment of a National AML/CFT Coordinator to supplement the NAMLC, reflecting an important recommendation of the assessors with a view to ensuring the most effective liaison between all the relevant agencies and providing enhanced impetus to our efforts; and
49
(4) The Government of Bermuda has developed a detailed plan of action to address outstanding issues in this critical area. The additional private and public sector reforms when fully implemented will ensure that Bermuda’s financial sector meets its obligations while maintaining Bermuda’s competitive position in the provision of premier financial services to the global community.
50
AN
NE
X II
I: A
ctio
ns in
Res
pons
e to
the
Rec
omm
enda
tions
of t
he 2
003
Ass
essm
ents
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
IAIS
Insu
ranc
e C
ore
Prin
cipl
es (2
000)
Org
aniz
atio
n of
an
Insu
ranc
e Su
perv
isor
IC
P 1:
The
insu
ranc
e su
perv
isor
of a
juris
dict
ion
mus
t be
org
aniz
ed so
that
it is
abl
e to
acc
ompl
ish
its
prim
ary
task
, i.e
., to
mai
ntai
n ef
ficie
nt, f
air,
safe
, an
d st
able
insu
ranc
e m
arke
ts fo
r the
ben
efit
and
prot
ectio
n of
pol
icyh
olde
rs. I
t sho
uld,
at a
ny ti
me,
be
abl
e to
car
ry o
ut th
is ta
sk e
ffic
ient
ly in
ac
cord
ance
with
the
Insu
ranc
e C
ore
Prin
cipl
es.
The
min
iste
r sho
uld
not h
ave
the
poss
ibili
ty to
gi
ve d
irect
ions
to th
e B
MA
.
The
BM
A sh
ould
con
tinue
to im
prov
e its
IT
syst
em a
nd to
recr
uit s
taff
, bot
h of
whi
ch a
re
prio
ritie
s.
Kno
wle
dge
of a
ctua
rial t
echn
ique
s sho
uld
be
deve
lope
d in
the
staf
f.
The
auth
oriti
es h
ave
not s
een
a ne
ed to
impl
emen
t an
y ch
ange
in th
e le
gisl
atio
n. T
he IA
doe
s not
mak
e pr
ovis
ion
for t
he m
inis
ter t
o in
terv
ene
in in
sura
nce
supe
rvis
ion.
Nor
doe
s the
pro
visi
on in
the
BM
A A
ct
empo
wer
the
min
iste
r to
give
dire
ctio
ns to
the
BM
A
in re
latio
n to
insu
ranc
e su
perv
isio
n. S
ectio
n 21
(1A
) of
the
BM
A A
ct, w
hich
pro
vide
s for
min
iste
rial
dire
ctio
ns to
the
BM
A, h
as to
be
read
in c
onte
xt.
The
subs
ectio
n is
con
tain
ed in
the
sect
ion
deal
ing
with
the
BM
A’s
rela
tions
with
gov
ernm
ent.
Und
er
that
sect
ion,
the
BM
A is
giv
en fu
nctio
ns o
f adv
isor
to
the
min
iste
r and
age
nt fo
r the
gov
ernm
ent.
Thos
e ar
eas f
all o
utsi
de th
e sc
ope
of re
gula
tory
act
s. C
onse
quen
tly, a
ny d
irect
ion
that
the
min
iste
r mig
ht
give
und
er th
at su
b-se
ctio
n co
uld
only
be
in re
latio
n to
thos
e ar
eas a
nd n
ot in
rela
tion
to su
perv
isor
y fu
nctio
ns o
f the
BM
A.
The
BM
A h
as c
arrie
d fo
rwar
d si
gnifi
cant
IT
deve
lopm
ent p
roje
cts a
nd is
at a
n ad
vanc
ed st
age
in
the
cons
truct
ion
of n
ew re
latio
nal d
atab
ases
pr
ovid
ing
muc
h en
hanc
ed c
apac
ity to
col
late
and
re
view
stat
istic
al a
nd p
rude
ntia
l inf
orm
atio
n in
su
ppor
t of i
ts su
perv
isor
y pr
ogra
ms.
Staf
fing
in th
e ID
, whi
ch h
ad a
lread
y ex
pand
ed to
som
e 25
by
May
20
04, h
as si
nce
incr
ease
d ag
ain
shar
ply
on th
e ba
ck
of si
gnifi
cant
ong
oing
recr
uitm
ent e
ffor
ts, b
oth
in
Ber
mud
a an
d in
tern
atio
nally
. By
July
200
7, th
e de
partm
ent’s
staf
f com
plem
ent h
ad m
ore
than
do
uble
d to
in e
xces
s of 5
0 pe
rson
s. Th
is
deve
lopm
ent h
as fa
cilit
ated
, in
parti
cula
r, a
maj
or
expa
nsio
n in
the
BM
A’s
on-
site
insp
ectio
n
51
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
capa
bilit
y. T
he d
epar
tmen
t has
had
in-h
ouse
ac
tuar
ial r
esou
rces
ava
ilabl
e to
it si
nce
2004
; the
se
wer
e au
gmen
ted
from
July
200
7 w
ith th
e ar
rival
of
two
full-
time
in-h
ouse
act
uarie
s. Th
e de
partm
ent
also
form
ed d
urin
g 20
07 a
n In
sura
nce
Sect
or
Ana
lysi
s Uni
t tha
t is t
aske
d w
ith:
a)
prov
idin
g ac
tuar
ial a
nd o
ther
supp
ort s
ervi
ces
to th
e de
partm
ent;
b)
assi
stin
g st
aff t
o de
velo
p ex
perti
se in
fina
ncia
l an
alys
is;
c)
desi
gnin
g to
ols t
o fa
cilit
ate
data
revi
ew a
nd
inte
rpre
tatio
n;
iden
tifyi
ng in
tern
atio
nal b
est p
ract
ice
and
deve
lopi
ng p
olic
ies c
onsi
sten
t with
such
pra
ctic
e;
and
clos
ely
mon
itorin
g in
dust
ry
trend
s/de
velo
pmen
ts a
nd d
eter
min
ing
key
regu
lato
ry
impl
icat
ions
for t
he d
epar
tmen
t.
Lic
ensi
ng a
nd C
hang
es in
Con
trol
ICPs
2–3
: C
ompa
nies
wis
hing
to u
nder
writ
e in
sura
nce
in th
e do
mes
tic in
sura
nce
mar
ket s
houl
d be
lice
nsed
.
The
insu
ranc
e su
perv
isor
shou
ld re
view
cha
nges
in
the
cont
rol o
f com
pani
es th
at a
re li
cens
ed in
the
juris
dict
ion.
The
insu
ranc
e su
perv
isor
shou
ld
esta
blis
h cl
ear r
equi
rem
ents
to b
e m
et w
hen
a ch
ange
in c
ontro
l occ
urs.
It is
reco
mm
ende
d th
at c
onsi
dera
tion
be g
iven
to
incr
easi
ng th
e qu
orum
requ
irem
ents
of t
he IA
C
Adm
issi
ons C
omm
ittee
, com
plet
ing
the
proj
ect t
o de
velo
p ex
plic
it fit
-and
-pro
per l
icen
sing
crit
eria
, an
d de
finin
g in
det
ail t
he re
quire
men
ts o
f the
bu
sine
ss p
lan.
The
defin
ition
of l
ong-
term
bus
ines
s sho
uld
be
mor
e pr
ecis
e.
Sign
ifica
nt c
hang
es in
ow
ners
hip
of p
ublic
co
mpa
nies
shou
ld b
e fo
rmal
ly n
otifi
ed to
the
BM
A.
The
BM
A h
as e
stab
lishe
d an
Ass
essm
ent &
Li
cens
ing
Com
mitt
ee, c
harg
ed w
ith re
view
ing
licen
sing
app
licat
ions
and
mak
ing
reco
mm
enda
tions
to
the
Supe
rvis
or o
f Ins
uran
ce. T
he c
omm
ittee
co
mpr
ises
a ra
nge
of se
nior
man
agem
ent s
taff
from
th
e In
sura
nce
and
BTI
Dep
artm
ents
as w
ell a
s the
B
MA
’s L
egal
Ser
vice
s and
Enf
orce
men
t D
epar
tmen
t.
The
IA w
as a
men
ded
in 2
006,
am
ong
othe
r thi
ngs t
o in
trodu
ce a
spec
ific
sche
dule
of m
inim
um li
cens
ing
crite
ria, i
nclu
ding
requ
irem
ents
for a
ll co
ntro
llers
an
d of
ficer
s to
be fi
t and
pro
per p
erso
ns. T
he a
ct
also
pro
vide
s for
the
BM
A to
pub
lish
a St
atem
ent o
f Pr
inci
ples
in a
ccor
danc
e w
ith w
hich
the
BM
A a
cts.
This
incl
udes
a d
etai
led
com
men
tary
on
the
BM
A’s
in
terp
reta
tion
of th
e m
inim
um li
cens
ing
crite
ria
52
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
incl
udin
g th
e fit
and
pro
per r
equi
rem
ents
. The
St
atem
ent o
f Prin
cipl
es h
as b
een
publ
ishe
d fo
r m
arke
t con
sulta
tion
and
was
ado
pted
form
ally
by
the
BM
A’s
Boa
rd in
June
200
7.
The
BM
A h
as a
lso
deve
lope
d a
deta
iled
chec
k-lis
t of
mat
ters
and
info
rmat
ion
that
mus
t be
cove
red
with
in a
lice
nsin
g ap
plic
atio
n, in
clud
ing
with
rega
rd
to sp
ecify
ing
busi
ness
pla
ns. A
dditi
onal
am
endm
ents
mad
e to
the
IA in
clud
e th
e in
trodu
ctio
n of
det
aile
d pr
ovis
ions
to d
eal w
ith th
e no
tific
atio
n an
d ap
prov
al o
f ow
ners
hip
chan
ges a
nd to
ena
ble
the
BM
A to
take
act
ion
in re
latio
n to
a c
ontro
ller
who
is d
eem
ed u
nfit.
Cor
pora
te G
over
nanc
e an
d In
tern
al C
ontr
ols
ICPs
4–5
: It i
s des
irabl
e th
at st
anda
rds b
e es
tabl
ishe
d in
the
juris
dict
ions
whi
ch d
eal w
ith
corp
orat
e go
vern
ance
.
The
insu
ranc
e su
perv
isor
shou
ld b
e ab
le to
revi
ew
the
inte
rnal
con
trols
that
the
boar
d of
dire
ctor
s and
m
anag
emen
t app
rove
and
app
ly, a
nd re
ques
t st
reng
then
ing
of th
e co
ntro
ls w
here
nec
essa
ry; a
nd
requ
ire th
e bo
ard
of d
irect
ors t
o pr
ovid
e su
itabl
e pr
uden
tial o
vers
ight
, suc
h as
setti
ng st
anda
rds f
or
unde
rwrit
ing
risks
and
setti
ng q
ualit
ativ
e an
d qu
antit
ativ
e st
anda
rds f
or in
vest
men
t and
liqu
idity
m
anag
emen
t.
In a
regi
me
larg
ely
depe
nden
t upo
n co
ntro
ls p
ut in
pl
ace
by th
e co
mpa
nies
them
selv
es, t
he re
gula
tor
mus
t be
able
to d
epen
d on
com
pani
es h
avin
g de
taile
d in
tern
al p
roce
dure
s ens
urin
g th
at
obje
ctiv
es a
re se
t, as
wel
l as p
roce
dure
s for
m
onito
ring
and
eval
uatin
g th
e pr
ogre
ss m
ade,
that
th
e re
spec
tive
acco
unta
bilit
ies o
f the
boa
rd a
nd th
e m
anag
emen
t are
cle
arly
def
ined
, and
that
the
bala
nce
betw
een
exec
utiv
e an
d no
n-ex
ecut
ive
mem
bers
of t
he b
oard
is k
ept.
Inte
rnal
con
trols
sh
ould
be
men
tione
d ex
plic
itly
as a
regu
lato
ry
impo
sitio
n.
The
flow
of i
nfor
mat
ion
betw
een
the
BM
A a
nd th
e au
dito
r sho
uld
be m
ore
freq
uent
and
, esp
ecia
lly,
mor
e de
taile
d. T
he su
perv
isor
shou
ld e
xplic
itly
requ
ire th
e au
dito
r to
do sp
ecifi
c ch
ecks
(inc
ludi
ng
the
revi
ew o
f int
erna
l con
trols
) and
the
audi
tor
shou
ld sy
stem
atic
ally
han
d in
a d
etai
led
writ
ten
repo
rt.
The
min
imum
lice
nsin
g cr
iteria
incl
ude
requ
irem
ents
for b
usin
ess t
o be
con
duct
ed in
a
prud
ent m
anne
r, w
hich
crit
erio
n in
clud
es a
re
quire
men
t for
ade
quat
e sy
stem
s of c
ontro
l. Th
e re
quire
men
ts a
re fu
rther
exp
ande
d up
on in
the
Stat
emen
t of P
rinci
ples
as w
ell a
s in
a G
uida
nce
Not
e (G
N) o
n R
isk
Man
agem
ent a
nd In
tern
al
Con
trols
, iss
ued
by th
e B
MA
in e
arly
200
5 an
d w
hich
was
reis
sued
in M
arch
200
8.
The
reco
mm
enda
tion
with
rega
rd to
inte
ract
ion
with
ex
tern
al a
udito
rs w
as p
redi
cate
d on
an
assu
mpt
ion
that
the
BM
A w
ould
be
look
ing
dire
ctly
to a
udito
rs
to c
ondu
ct a
dditi
onal
wor
k in
supp
ort o
f the
su
perv
isor
y pr
oces
s. In
fact
, the
BM
A h
as si
nce
mov
ed to
step
up
its o
wn
in-h
ouse
reso
urce
s de
vote
d to
on-
site
insp
ectio
n, a
nd d
oes n
ot in
tend
to
rely
rout
inel
y on
add
ition
al w
ork
by e
xter
nal
audi
tors
.
53
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
Prud
entia
l Rul
es IC
Ps 6
–10:
Sta
ndar
ds sh
ould
be
esta
blis
hed
with
resp
ect t
o th
e as
sets
of c
ompa
nies
lic
ense
d to
ope
rate
in th
e ju
risdi
ctio
n.
Insu
ranc
e su
perv
isor
s sho
uld
esta
blis
h st
anda
rds
with
resp
ect t
o th
e lia
bilit
ies o
f com
pani
es li
cens
ed
to o
pera
te in
thei
r jur
isdi
ctio
n.
The
requ
irem
ents
rega
rdin
g th
e ca
pita
l to
be
mai
ntai
ned
by c
ompa
nies
whi
ch a
re li
cens
ed, o
r se
ekin
g a
licen
se, i
n th
e ju
risdi
ctio
n sh
ould
be
clea
rly d
efin
ed a
nd sh
ould
add
ress
the
min
imum
le
vels
of c
apita
l or t
he le
vels
of d
epos
its th
at
shou
ld b
e m
aint
aine
d. C
apita
l ade
quac
y re
quire
men
ts sh
ould
refle
ct th
e si
ze, c
ompl
exity
, an
d bu
sine
ss ri
sks o
f the
com
pany
in th
e ju
risdi
ctio
n.
The
insu
ranc
e su
perv
isor
shou
ld b
e ab
le to
set
requ
irem
ents
with
resp
ect t
o th
e us
e of
fina
ncia
l in
stru
men
ts th
at m
ay n
ot fo
rm a
par
t of t
he
finan
cial
repo
rt of
a c
ompa
ny li
cens
ed in
the
juris
dict
ion.
Insu
ranc
e co
mpa
nies
use
rein
sura
nce
as a
mea
ns o
f ris
k co
ntai
nmen
t. Th
e in
sura
nce
supe
rvis
or m
ust
be a
ble
to re
view
rein
sura
nce
arra
ngem
ents
, to
asse
ss th
e de
gree
of r
elia
nce
plac
ed o
n th
ese
arra
ngem
ents
and
to d
eter
min
e th
e ap
prop
riate
ness
of
such
relia
nce.
Insu
ranc
e co
mpa
nies
wou
ld b
e ex
pect
ed to
ass
ess t
he fi
nanc
ial p
ositi
ons o
f the
ir re
insu
rers
in d
eter
min
ing
an a
ppro
pria
te le
vel o
f ex
posu
re to
them
.
The
BM
A sh
ould
con
side
r est
ablis
hing
pro
visi
ons
defin
ing
the
dive
rsifi
catio
n of
ass
et b
y ty
pe,
limiti
ng th
e am
ount
s tha
t can
be
held
by
asse
t and
re
quiri
ng a
ppro
pria
te m
atch
ing
of a
sset
s and
lia
bilit
ies.
Reg
ulat
ion
shou
ld re
quire
that
reas
onab
ly se
cure
as
sets
cov
er a
dequ
atel
y ca
lcul
ated
insu
ranc
e re
serv
es.
The
info
rmat
ion
in th
e an
nual
stat
utor
y fil
ings
sh
ould
be
mor
e de
taile
d co
ncer
ning
the
lines
of
busi
ness
and
rese
rves
(gro
ss a
nd n
et re
serv
es p
er
line
of b
usin
ess a
s wel
l as s
peci
fic in
form
atio
n on
re
cove
ries,
loss
exp
ense
s res
erve
s and
liqu
idat
ion
of re
serv
es).
The
acco
untin
g st
anda
rd u
sed
by th
e co
mpa
ny
shou
ld b
e ex
plic
itly
stat
ed in
the
stat
utor
y fil
ings
.
A g
ener
al ru
le li
miti
ng re
insu
ranc
e re
cove
rabl
es
shou
ld b
e se
t (ex
clud
ing
not r
ated
or b
elow
in
vest
men
t gra
de re
insu
rers
, for
exa
mpl
e).
Reg
ulat
ion
shou
ld e
xplic
itly
allo
w fo
r a p
rem
ium
in
suff
icie
ncy
rese
rve.
The
BM
A sh
ould
cla
rify
the
audi
tor’
s res
pons
ibili
ties a
s to
the
relia
bilit
y of
the
data
, and
requ
ire a
fina
l aud
itor r
epor
t ind
icat
ing
prec
isel
y th
e ch
ecks
mad
e on
the
gene
ral d
ata,
and
m
ore
spec
ifica
lly, o
n ac
tuar
ial d
ata.
The
actu
ary’
s rep
ort s
houl
d in
clud
e de
taile
d in
dica
tions
on
the
met
hod
used
for r
eser
ving
and
th
e ve
rific
atio
ns c
ondu
cted
.
The
com
puls
ory
disc
losu
re o
f off
-bal
ance
shee
t ite
ms w
ould
incr
ease
the
accu
racy
of t
he fi
nanc
ial
stat
emen
ts.
The
appr
opria
tene
ss o
f the
rein
sura
nce
prog
ram
to
In li
ght o
f the
nat
ure
of th
e B
erm
uda
mar
ket,
the
BM
A h
as n
ot so
ught
to st
ipul
ate
spec
ific
dive
rsifi
catio
n lim
its. T
hrou
gh th
e St
atem
ent o
f Pr
inci
ples
and
cur
rent
gui
danc
e no
tes,
as w
ell a
s the
C
ode
of C
ondu
ct w
hose
con
sulta
tive
draf
t was
pu
blis
hed
in Ju
ly 2
007,
the
onus
is p
lace
d on
the
boar
ds o
f reg
iste
red
pers
ons t
o as
sess
and
mon
itor
risks
eff
ectiv
ely
and
to e
stab
lish
limits
for a
sset
al
loca
tion
as p
art o
f the
ir ov
eral
l int
erna
l con
trol
envi
ronm
ent w
hich
are
app
ropr
iate
for t
he b
usin
ess.
The
appl
icat
ion
of th
e ne
w ri
sk b
ased
cap
ital
prov
isio
ns w
ill a
lso
have
the
effe
ct o
f fur
ther
re
info
rcin
g pr
uden
ce w
ith re
gard
to a
sset
allo
catio
n an
d di
strib
utio
n th
roug
h th
e im
pact
on
requ
ired
regu
lato
ry c
apita
l.
In M
arch
200
6, th
e B
MA
issu
ed g
uida
nce
note
14
on th
e ap
poin
tmen
t und
er th
e IA
of a
loss
rese
rve
spec
ialis
t, ap
prov
ed b
y th
e B
MA
, who
se ro
le is
to
prov
ide
an o
pini
on o
n th
e ad
equa
cy o
f gen
eral
in
sura
nce
rese
rves
stat
ed in
the
stat
utor
y fin
anci
al
stat
emen
ts.
The
BM
A is
at a
late
stag
e in
the
deve
lopm
ent a
nd
impl
emen
tatio
n of
a n
ew ri
sk-b
ased
cap
ital r
egim
e w
hich
will
be
appl
ied
in th
e fir
st in
stan
ce to
Cla
ss 4
co
mpa
nies
bef
ore
bein
g ro
lled
out t
o th
ose
Cla
ss 3
co
mpa
nies
for w
hich
it is
app
ropr
iate
. (Se
e th
e Ju
ly
2007
con
sulta
tive
pape
r). A
s par
t of t
his
deve
lopm
ent,
mor
e de
taile
d st
atut
ory
filin
gs w
ill b
e re
quire
d, c
over
ing
the
addi
tiona
l inf
orm
atio
n se
t out
in
par
agra
ph 1
3 of
the
cons
ulta
tive
pape
r.
54
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
cove
r the
pro
file
of th
e ris
ks u
nder
writ
ten
shou
ld
be c
heck
ed, e
ither
by
the
insu
ranc
e su
perv
isor
or
by o
utso
urci
ng to
the
audi
tor.
Aud
itors
shou
ld sy
stem
atic
ally
writ
e m
anag
emen
t le
tters
.
Mar
ket C
ondu
ct IC
P 11
: Ins
uran
ce su
perv
isor
s sh
ould
ens
ure
that
insu
rers
and
inte
rmed
iarie
s ex
erci
se th
e ne
cess
ary
know
ledg
e, sk
ills,
and
inte
grity
in d
ealin
g w
ith th
eir c
usto
mer
s.
It is
reco
mm
ende
d th
at m
arke
t con
duct
cus
tom
er-
rela
ted
issu
es b
e ad
dres
sed
for t
he in
divi
dual
or
smal
l cor
pora
te B
erm
udia
n po
licyh
olde
rs (t
o re
ceiv
e m
eani
ngfu
l and
und
erst
anda
ble
info
rmat
ion
in a
tim
ely
man
ner a
nd to
hav
e ac
cess
to
an
equi
tabl
e tre
atm
ent o
f the
ir co
mpl
aint
s). T
he
exis
tenc
e of
the
Con
sum
er A
ffai
rs B
urea
u co
uld
be m
entio
ned
in th
e ne
w in
sura
nce
polic
ies t
o in
crea
se in
divi
dual
pol
icyh
olde
rs’ a
war
enes
s tha
t su
ch p
ossi
bilit
ies a
re o
pen,
for e
xam
ple.
The
BM
A d
evel
oped
in e
arly
200
5 a
deta
iled
guid
ance
not
e on
mar
ket c
ondu
ct fo
r dom
estic
bu
sine
ss. T
his m
ater
ial w
as re
issu
ed in
July
200
7 as
pa
rt of
the
cons
ulta
tive
draf
t of t
he C
ode
of C
ondu
ct
(Sec
tion
9) fo
r whi
ch th
e ac
t now
pro
vide
s.
Mon
itori
ng, I
nspe
ctio
n, a
nd S
anct
ions
ICPs
12–
14: I
t is i
mpo
rtant
that
insu
ranc
e su
perv
isor
s get
th
e in
form
atio
n th
ey n
eed
to p
rope
rly fo
rm a
n op
inio
n on
the
finan
cial
stre
ngth
of t
he o
pera
tions
of
eac
h in
sura
nce
com
pany
in th
eir j
uris
dict
ion.
Th
e in
form
atio
n ne
eded
to c
arry
out
this
revi
ew
and
anal
ysis
is o
btai
ned
from
the
finan
cial
and
st
atis
tical
repo
rts th
at a
re fi
led
on a
regu
lar b
asis
, su
ppor
ted
by in
form
atio
n ob
tain
ed th
roug
h sp
ecia
l in
form
atio
n re
ques
ts, o
n-si
te in
spec
tions
, and
co
mm
unic
atio
n w
ith a
ctua
ries a
nd e
xter
nal
audi
tors
.
The
insu
ranc
e su
perv
isor
shou
ld b
e ab
le to
car
ry
out o
n-si
te in
spec
tions
to re
view
the
busi
ness
and
co
mpa
ny, i
nclu
ding
the
insp
ectio
n re
cord
s, ac
coun
ts, a
nd o
ther
doc
umen
ts.
This
may
be
limite
d to
the
oper
atio
n of
the
com
pany
in th
e ju
risdi
ctio
n or
, sub
ject
to th
e
In o
rder
to h
ave
a be
tter u
nder
stan
ding
of t
he
mar
ket,
the
finan
cial
repo
rting
shou
ld b
e m
ore
deta
iled,
and
dis
tingu
ish
dire
ct a
nd a
ssum
ed
insu
ranc
e, li
nes o
f bus
ines
s, an
d fo
r rei
nsur
ance
, ty
pe o
f con
tract
s (fo
r exa
mpl
e, p
ropo
rtion
al
treat
ies,
non-
prop
ortio
nal t
reat
ies,
and
facu
ltativ
es).
The
info
rmat
ion
on lo
sses
shou
ld b
e co
nsid
erab
ly e
xpan
ded
to in
clud
e, in
ter a
lia, d
ata
on th
e liq
uida
tion
of th
e pr
ovis
ions
.
The
BM
A sh
ould
requ
ire th
e ac
tuar
y an
d/or
the
loss
rese
rve
spec
ialis
t to
give
exp
licit
writ
ten
com
men
ts o
n re
serv
ing
adeq
uacy
.
The
finan
cial
retu
rns s
houl
d be
regu
larly
upd
ated
.
Con
solid
ated
info
rmat
ion,
whe
re a
pplic
able
, and
qu
arte
rly a
ccou
nts,
at le
ast f
or C
lass
es 3
and
4
com
pani
es, c
ould
be
requ
ired.
Cla
ss 1
com
pani
es sh
ould
file
thei
r fin
anci
al
See
earli
er c
omm
ents
: the
BM
A w
ill b
e in
trodu
cing
a
num
ber o
f am
endm
ents
to it
s sta
tuto
ry re
porti
ng
requ
irem
ents
as p
art o
f its
ong
oing
pro
gram
of
upda
ting
the
insu
ranc
e re
gim
e Cla
ss 1
insu
rers
are
no
w re
quire
d to
file
fina
ncia
l sta
tem
ents
.
The
BM
A h
as m
oved
ove
r the
pas
t 3 y
ears
to
incr
ease
shar
ply
the
in-h
ouse
insp
ectio
n re
sour
ces
avai
labl
e fo
r on-
site
wor
k in
the
com
mer
cial
sect
or.
Cur
rent
ly th
ere
are
4 se
para
te o
n-si
te in
spec
tion
team
s dep
loye
d. S
epar
ate
team
s als
o un
derta
ke
star
t-up
revi
ews,
gene
rally
with
in th
e fir
st 1
2 m
onth
s afte
r lic
ensi
ng, a
s wel
l as r
evie
ws o
f in
sura
nce
man
ager
s.
The
amen
ded
IA in
clud
es o
ngoi
ng m
inim
um
licen
sing
crit
eria
with
rega
rd to
fitn
ess a
nd
prop
erne
ss o
f con
trolle
rs a
nd o
ffice
rs a
nd th
e
55
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
agre
emen
t of t
he re
spec
tive
supe
rvis
ors,
incl
ude
othe
r jur
isdi
ctio
ns in
whi
ch th
e co
mpa
ny o
pera
tes;
an
d re
ques
t and
rece
ive
any
info
rmat
ion
from
co
mpa
nies
lice
nsed
in it
s jur
isdi
ctio
n, w
heth
er th
is
info
rmat
ion
be sp
ecifi
c to
a c
ompa
ny o
r be
requ
este
d of
all
com
pani
es.
Insu
ranc
e su
perv
isor
s mus
t hav
e th
e po
wer
to ta
ke
rem
edia
l act
ion
whe
re p
robl
ems i
nvol
ving
lice
nsed
co
mpa
nies
are
iden
tifie
d. T
he in
sura
nce
supe
rvis
or
mus
t hav
e a
rang
e of
act
ions
ava
ilabl
e in
ord
er to
ap
ply
appr
opria
te sa
nctio
ns to
pro
blem
s en
coun
tere
d.
stat
emen
ts w
ith th
e su
perv
isor
.
The
inde
pend
ent r
evie
wer
s spe
cific
ally
man
date
d by
the
BM
A sh
ould
giv
e th
e B
MA
acc
ess t
o th
eir
wor
king
pap
ers.
The
BM
A m
ust h
ave
the
capa
bilit
y, e
ither
dire
ctly
or i
ndire
ctly
, of c
heck
ing
the
revi
ewer
s’ w
orki
ng p
aper
s.
The
num
ber o
f app
oint
ed in
spec
tors
to c
ondu
ct o
n-si
te in
spec
tions
shou
ld b
e in
crea
sed.
It is
ess
entia
l tha
t the
supe
rvis
or b
e ca
pabl
e of
ve
rifyi
ng th
e in
form
atio
n gi
ven
by th
e co
mpa
ny,
dire
ctly
or i
ndire
ctly
. To
stre
ngth
en th
e au
thor
ity
to im
pose
sanc
tions
, it i
s rec
omm
ende
d th
at:
1) E
xplic
it po
wer
s be
give
n to
the
BM
A to
in
terv
ene
to re
quire
cha
nges
in th
e co
mpo
sitio
n of
th
e bo
ard
and/
or se
nior
man
agem
ent i
f the
insu
rer
is fo
und
to b
e in
a h
azar
dous
con
ditio
n.
Alte
rnat
ivel
y, it
is re
com
men
ded
that
the
BM
A b
e ab
le to
ves
t tem
pora
ry c
ontro
l and
man
agem
ent
pow
ers i
n th
e in
spec
tor o
r oth
er p
erso
n w
ith
auth
ority
to a
ct to
rect
ify a
n in
sure
r’s h
azar
dous
co
nditi
on sh
ort o
f ini
tiatin
g in
solv
ency
pr
ocee
ding
s in
cour
t; 2)
Leg
isla
tion
be c
onsi
dere
d to
allo
w th
e B
MA
the
expr
ess l
egal
aut
horit
y to
requ
ire th
e su
bmis
sion
of
a w
ritte
n re
cove
ry p
lan
with
in a
rela
tivel
y sh
ort
time.
3)
An
expa
nded
rang
e of
civ
il pe
nalti
es m
ay b
e co
nsid
ered
in in
stan
ces w
here
lega
l req
uire
men
ts
are
not m
et, b
ut th
e fa
ilure
to m
eet t
hem
doe
s not
ris
e to
the
leve
l of c
rimin
al c
ondu
ct.
com
posi
tion
of th
e bo
ard
of d
irect
ors,
as w
ell a
s a
requ
irem
ent f
or b
usin
ess t
o be
con
duct
ed p
rude
ntly
an
d w
ith in
tegr
ity a
nd a
ppro
pria
te p
rofe
ssio
nal
skill
s.
The
BM
A’s
inte
rven
tion
pow
ers u
nder
sect
ion
32 o
f th
e ac
t inc
lude
pro
visi
on fo
r it t
o gi
ve d
irect
ions
to
rem
ove
a co
ntro
ller o
r offi
cer.
Cro
ss-B
orde
r O
pera
tions
, Sup
ervi
sory
It
is re
com
men
ded
that
BM
A’s
abi
lity
to re
gula
te
The
IA p
rovi
des e
ffec
tive
pow
ers f
or th
e B
MA
to
56
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
Coo
rdin
atio
n an
d C
oope
ratio
n, a
nd
Con
fiden
tialit
y IC
Ps 1
5–17
: Ins
uran
ce
com
pani
es a
re b
ecom
ing
incr
easi
ngly
inte
rnat
iona
l in
scop
e, e
stab
lishi
ng b
ranc
hes a
nd su
bsid
iarie
s ou
tsid
e th
eir h
ome
juris
dict
ion,
and
som
etim
es
cond
uctin
g cr
oss-
bord
er b
usin
ess o
n a
serv
ices
ba
sis o
nly.
Incr
easi
ngly
, ins
uran
ce su
perv
isor
s lia
ise
with
ea
ch o
ther
to e
nsur
e th
at e
ach
is a
war
e of
the
othe
r’s c
once
rns w
ith re
spec
t to
an in
sura
nce
com
pany
that
ope
rate
s in
mor
e th
an o
ne
juris
dict
ion,
eith
er d
irect
ly o
r thr
ough
a se
para
te
corp
orat
e en
tity.
In o
rder
to sh
are
rele
vant
info
rmat
ion
with
oth
er
insu
ranc
e su
perv
isor
s, ad
equa
te a
nd e
ffect
ive
com
mun
icat
ion
shou
ld b
e de
velo
ped
and
mai
ntai
ned.
All
insu
ranc
e su
perv
isor
s sho
uld
be su
bjec
t to
prof
essi
onal
secr
ecy
cons
train
ts in
resp
ect o
f in
form
atio
n ob
tain
ed in
the
cour
se o
f the
ir ac
tiviti
es, i
nclu
ding
dur
ing
the
cond
uct o
f on-
site
in
spec
tions
.
The
insu
ranc
e su
perv
isor
is re
quire
d to
hol
d co
nfid
entia
l any
info
rmat
ion
rece
ived
from
oth
er
insu
ranc
e su
perv
isor
s, ex
cept
whe
re c
onst
rain
ed
by la
w o
r in
situ
atio
ns w
here
the
insu
ranc
e su
perv
isor
who
pro
vide
d th
e in
form
atio
n pr
ovid
es
auth
oriz
atio
n fo
r its
rele
ase.
cros
s-bo
rder
bus
ines
s ope
ratio
ns b
e st
reng
then
ed
by a
men
ding
rele
vant
stat
utor
y pr
ovis
ions
rela
ting
to d
iscl
osur
e of
info
rmat
ion.
“Fa
st tr
ack
prov
isio
ns”
may
be
cons
ider
ed fo
r inc
lusi
on to
fu
rther
faci
litat
e th
e tim
ely
exch
ange
of
info
rmat
ion
betw
een
coop
erat
ing
auth
oriti
es. S
uch
a pr
ovis
ion
can
be c
ondi
tione
d on
a p
re-e
xist
ing
mem
oran
dum
of u
nder
stan
ding
rega
rdin
g in
form
atio
n sh
arin
g ex
ecut
ed b
etw
een
Ber
mud
a an
d co
oper
atin
g ou
tsid
e or
fore
ign
juris
dict
ions
.
Giv
en th
e im
porta
nce
of p
rote
ctin
g th
e co
nfid
entia
lity
of c
erta
in in
form
atio
n, th
e gr
avity
of
pen
altie
s tha
t atta
ch to
the
unla
wfu
l dis
clos
ure
of in
form
atio
n an
d th
e co
mpl
exity
of t
he st
atut
e in
its
pre
sent
form
, con
side
ratio
n sh
ould
be
give
n to
a
tech
nica
l rev
isio
n of
sect
ions
of t
he IA
alo
ng w
ith
the
rele
vant
par
alle
l BM
A A
ct, f
or p
urpo
ses o
f cl
arity
and
org
aniz
atio
n.
coop
erat
e by
shar
ing
info
rmat
ion
with
fore
ign
regu
lato
rs, a
s wel
l as p
ower
s to
obta
in in
form
atio
n fr
om li
cens
ed p
erso
ns in
ord
er to
ass
ist a
noth
er
regu
lato
r. In
pra
ctic
e, th
ese
prov
isio
ns h
ave
oper
ated
satis
fact
orily
The
BM
A d
oes n
ot n
eed
a bi
late
ral M
OU
in o
rder
to b
e ab
le to
coo
pera
te. I
t ha
s als
o co
nfirm
ed th
at it
will
be
appl
ying
to b
e a
sign
ator
y of
the
IAIS
MM
OU
.
Bas
el C
ore
Prin
cipl
es fo
r E
ffec
tive
Ban
king
Sup
ervi
sion
(199
9)
CP
1.2
Inde
pend
ence
Th
e M
OF’
s pow
ers t
o gi
ve d
irect
ions
to th
e B
MA
an
d th
e bu
dget
ary
appr
oval
pro
cedu
re h
ave
the
The
auth
oriti
es h
ave
revi
ewed
the
mat
ter c
aref
ully
bu
t hav
e no
t see
n a
need
to im
plem
ent a
ny c
hang
e
57
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
in th
e le
gisl
atio
n. T
he m
inis
teria
l pow
er o
f dire
ctio
n in
the
BD
CA
is e
xpre
ssly
lim
ited
to m
atte
rs o
f a
gene
ral p
olic
y na
ture
rela
ting
to th
e pe
rfor
man
ce o
f th
e B
MA
’s fu
nctio
ns u
nder
the
act,
and
wor
ding
al
so m
akes
it c
lear
that
the
BM
A c
ould
not
be
dire
cted
to a
ct in
a m
anne
r inc
onsi
sten
t with
the
dutie
s im
pose
d on
it u
nder
the
act.
In p
ract
ice,
it
rem
ains
the
case
that
no
dire
ctio
ns h
ave
ever
bee
n is
sued
. Sim
ilarly
, fol
low
ing
care
ful r
evie
w, n
o ch
ange
s to
the
BM
A’s
bud
geta
ry p
roce
ss h
ave
been
de
term
ined
by
gove
rnm
ent t
o be
nec
essa
ry. I
t sh
ould
be
note
d th
at th
e B
MA
's pr
opos
ed
expe
nditu
re b
udge
ts h
ave
neve
r bee
n re
fuse
d or
re
stric
ted
by th
e M
OF.
pote
ntia
l of i
ntru
ding
on
the
oper
atio
nal
inde
pend
ence
of t
he la
tter.
It is
reco
mm
ende
d th
at
the
law
be
revi
ewed
to d
eal w
ith th
e co
ncer
n th
at
the
MO
F’s p
olic
y di
rect
ion
and
budg
etar
y ap
prov
al
pow
ers m
ay in
trude
on
the
perf
orm
ance
of t
he
BM
A’s
func
tions
.
An
in-d
epth
ana
lysis
of t
he re
sour
ces r
equi
red
to
fulfi
ll th
e su
perv
isory
obj
ectiv
es is
reco
mm
ende
d,
toge
ther
with
an
actio
n pl
an d
escr
ibin
g im
plem
enta
tion
of th
e ob
ject
ives
.
CP
6 C
apita
l ade
quac
y an
d C
P 12
Mar
ket r
isk
Envi
sage
the
repl
acem
ent o
f the
pre
sent
pro
xy
syste
m fo
r tra
ding
risk
by
a m
ore
appr
opria
te
capi
tal r
equi
rem
ent s
yste
m.
The
BM
A h
as d
evel
oped
and
impl
emen
ted
a fu
ll m
arke
t ris
k fr
amew
ork,
con
sist
ent w
ith th
e B
asel
re
quire
men
ts, w
here
inst
itutio
ns ta
ke o
n m
ater
ial
leve
ls o
f tra
ded
mar
ket e
xpos
ure.
BM
A’s
on-
site
revi
ews o
f ban
ks’ c
redi
t qua
lity
and
proc
esse
s now
incl
ude
fulle
r eva
luat
ion
of th
eir
inte
rnal
cla
ssifi
catio
n sy
stem
s for
cre
dits
.
CP
8 Lo
an e
valu
atio
n an
d lo
an lo
ss p
rovi
sioni
ng
The
BM
A re
lies p
rinci
pally
on
exte
rnal
aud
itors
to
eval
uate
the
qual
ity o
f ass
ets a
nd th
e ad
equa
cy o
f pr
ovis
ioni
ng. B
MA
shou
ld c
onsi
der u
nder
taki
ng
its o
wn
eval
uatio
n of
a b
ank’
s int
erna
l rat
ing
syst
em to
gai
n in
sigh
t on
impl
emen
tatio
n of
cre
dit
risk
man
agem
ent p
olic
ies a
nd m
anag
emen
t’s
abili
ty to
man
age
and
mon
itor o
utst
andi
ng c
redi
t ris
k.
CP
10 C
onne
cted
lend
ing
The
BM
A sh
ould
enh
ance
its c
urre
nt p
olic
y ad
dres
sing
con
nect
ed le
ndin
g by
ens
urin
g th
at
bank
s hav
e sa
tisfa
ctor
y m
eans
to m
onito
r and
co
ntro
l the
se re
latio
nshi
ps. B
MA
exa
min
ers
shou
ld ro
utin
ely
revi
ew th
ese
rela
tions
hips
as p
art
of th
e on
-site
exa
min
atio
n pr
ogra
m
The
BM
A h
as is
sued
a re
vise
d po
licy
pape
r, “T
he
Man
agem
ent a
nd C
ontro
l of C
redi
t Ris
ks a
nd th
e Im
plem
enta
tion
of th
e St
atut
ory
Prov
isio
ns fo
r La
rge
Expo
sure
s”. T
he n
ew p
aper
incl
udes
gre
ater
fo
cus o
n co
nnec
ted
lend
ing
issu
es w
ithin
the
over
all
asse
ssm
ent o
f ban
ks’ l
endi
ng p
olic
ies a
nd c
ontro
ls;
this
asp
ect i
s rou
tinel
y re
view
ed a
s par
t of o
n-si
te
58
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
exam
inat
ions
of c
redi
t.
Rat
her t
han
deve
lopi
ng st
anda
rdiz
ed re
porti
ng,
BM
A h
as re
ques
ted
ad h
oc re
ports
of c
ount
ry ri
sk
expo
sure
from
ban
ks. H
owev
er, s
tand
ardi
zed
repo
rts a
re li
kely
to b
e de
velo
ped
as p
art o
f the
re
view
of b
anks
’ rep
ortin
g th
at is
now
und
erw
ay, a
s pa
rt of
BM
A’s
pre
para
tions
for i
mpl
emen
ting
Bas
el
2.
CP
11 C
ount
ry r
isk
The
BM
A sh
ould
est
ablis
h a
form
al re
porti
ng
met
hodo
logy
to fa
cilit
ate
the
mon
itorin
g of
co
untry
risk
exp
osur
e in
its b
anks
.
The
BM
A h
as is
sued
revi
sed
polic
y pa
pers
“Th
e M
onito
ring
and
Con
trol o
f Int
eres
t Rat
e R
isk”
, “Th
e M
easu
rem
ent a
nd M
onito
ring
of L
iqui
dity
”, a
nd
“The
out
sour
cing
of S
ervi
ces o
r Fun
ctio
ns b
y In
stitu
tions
Lic
ense
d un
der t
he b
anks
and
Dep
osit
Com
pani
es A
ct 1
999”
. Th
e B
MA
has
als
o is
sued
a
new
pol
icy
pape
r, “T
he M
anag
emen
t of O
pera
tiona
l R
isk”
. The
on-
site
exa
min
atio
n pr
oces
ses a
nd
insp
ectio
n m
anua
l hav
e be
en a
ugm
ente
d to
cov
er
the
requ
irem
ents
of t
hese
pol
icie
s.
CP
13 O
ther
ris
ks
The
BM
A sh
ould
con
sider
aug
men
ting
on-s
ite
exam
inat
ion
tech
niqu
es a
nd p
ract
ices
des
igne
d to
co
nfirm
the
exist
ence
and
app
licat
ion
of a
n ef
fect
ive
and
com
preh
ensiv
e ris
k m
anag
emen
t pro
cess
for
inte
rest
rate
risk
and
fina
ncia
l der
ivat
ive
instr
umen
ts, a
nd th
e ad
equa
cy o
f inf
orm
atio
n te
chno
logy
syste
ms.
Issu
ance
of a
pol
icy
on
outso
urci
ng o
f ban
k op
erat
ions
shou
ld a
lso b
e co
nsid
ered
.
CP
16 O
n-sit
e an
d O
ff-sit
e su
perv
ision
Th
e m
aint
enan
ce o
f ade
quat
e sta
ff re
sour
ces
rem
ains
crit
ical
in v
iew
of t
he b
ank
supe
rvisi
on
man
date
ass
igne
d to
the
BM
A. S
ome
furth
er
incr
ease
in th
e nu
mbe
r of p
rofe
ssio
nals
and
the
brea
dth
of th
eir e
xper
tise
shou
ld b
e co
nsid
ered
. A
com
preh
ensi
ve e
xam
inat
ion
man
ual r
efle
ctin
g ba
nk
supe
rvisi
on p
olic
y an
d ex
amin
atio
n pr
oced
ure
is
war
rant
ed to
pre
serv
e cu
rren
t exa
min
atio
n pr
actic
e,
refle
ct B
MA
ban
k su
perv
ision
pol
icy
and
ensu
re
cont
inui
ty in
app
licat
ion
of p
roce
dure
s as s
taffi
ng
chan
ges.
A m
ore
stand
ardi
zed
regi
men
to
docu
men
t exa
min
atio
n co
nclu
sions
is a
lso
war
rant
ed b
y ad
optin
g a
mor
e fo
rmal
ized
syst
em o
f w
orki
ng p
aper
s ref
lect
ing
the
wor
k pe
rform
ed
durin
g on
-site
exa
min
atio
ns.
The
BM
A h
as re
stru
ctur
ed it
s BTI
dep
artm
ent t
o su
ppor
t a ri
sk-b
ased
app
roac
h to
supe
rvis
ion
whi
ch
invo
lves
the
appl
icat
ion
of st
anda
rdiz
ed a
naly
sis a
nd
asse
ssm
ent i
n or
der t
o id
entif
y hi
gher
risk
ban
ks;
ther
eby
prov
idin
g fo
r sup
ervi
sion
that
is m
ore
effe
ctiv
e an
d pe
rmitt
ing
a m
ore
effic
ient
allo
catio
n of
BM
A’s
reso
urce
s. Th
ere
has a
lso
been
a
sign
ifica
nt in
crea
se in
the
depa
rtmen
t’s st
affin
g le
vels
, exp
erie
nce,
and
exp
ertis
e. B
udge
ted
depa
rtmen
t hea
dcou
nt h
as in
crea
sed
from
23
to 2
8,
with
pre
sent
ly 4
vac
ant p
ositi
ons.
A c
ompr
ehen
sive
exa
min
atio
n m
anua
l has
bee
n cr
eate
d th
at re
flect
s cur
rent
pol
icy
and
proc
edur
e,
and
prom
otes
the
mai
nten
ance
of s
tand
ardi
zed
59
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
wor
king
pap
ers.
The
anal
ysis
of d
ata
has b
een
enha
nced
with
the
rest
ruct
urin
g of
the
depa
rtmen
t and
the
crea
tion
of a
ne
w R
isk
Ana
lysi
s Uni
t. D
ata
rece
ived
from
the
inst
itutio
ns, i
nclu
ding
Pru
dent
ial I
nfor
mat
ion
Ret
urns
(PIR
), fin
anci
al st
atem
ents
, man
agem
ent
acco
unts
, stra
tegy
doc
umen
ts, b
usin
ess p
lans
, and
bu
dget
s are
thor
ough
ly re
view
ed o
n a
quar
terly
ba
sis.
CP
18 O
ff-sit
e su
perv
ision
Th
e B
MA
shou
ld c
onsid
er e
nhan
cing
the
off-
site
supe
rvisi
on fu
nctio
n by
ana
lyzi
ng th
e da
ta o
btai
ned
in p
rude
ntia
l ret
urns
mor
e fu
lly, i
n ad
ditio
n to
ut
ilizi
ng th
e da
ta fo
r che
ckin
g co
mpl
ianc
e w
ith la
w
and
regu
latio
n. T
he d
ata
can
be u
sed
to c
ompa
re
perfo
rman
ce o
f the
ban
ks in
the
syste
m, a
naly
ze
trend
s, an
d to
cre
ate
an e
arly
war
ning
syste
m.
Rep
ortin
g ac
coun
tant
s hav
e be
en u
sed
rout
inel
y fo
r so
me
year
s to
prov
ide
reas
sura
nce
that
pru
dent
ial
and
stat
istic
al d
ata
prov
ided
by
bank
s are
relia
ble.
D
urin
g 20
06, B
MA
initi
ated
dis
cuss
ions
with
the
Inst
itute
of C
harte
red
Acc
ount
ants
in B
erm
uda
(IC
AB
), w
ith a
vie
w to
agr
eein
g st
anda
rd
arra
ngem
ents
gov
erni
ng th
e ex
tens
ion
of th
e se
ctio
n 39
pow
er to
incl
ude
the
com
mis
sion
ing
of re
ports
on
the
effe
ctiv
enes
s of a
spec
ts o
f ins
titut
ions
’ in
tern
al c
ontro
l env
ironm
ent.
Thes
e di
scus
sion
s are
on
goin
g.
CP
19 V
alid
atio
n of
supe
rvis
ory
info
rmat
ion
It w
ould
be
usef
ul fo
r the
BM
A to
em
ploy
the
prov
ision
s of s
ectio
n 39
of B
anks
and
Dep
osit
Com
pani
es A
ct, 1
999
(BD
CA) m
ore
wid
ely
as a
m
eans
to in
crea
se sy
nerg
ies w
ith e
xter
nal a
udito
rs.
The
BM
A c
ould
requ
est e
xter
nal a
udito
rs to
pe
rform
add
ition
al w
ork
to c
ompl
emen
t the
BM
A’s
ex
amin
atio
n re
gim
en in
cap
ital m
arke
ts ac
tiviti
es,
info
rmat
ion
tech
nolo
gy, o
r in
othe
r pre
dete
rmin
ed
area
s. Th
is w
ould
ena
ble
the
BM
A to
cap
italiz
e on
str
engt
hs th
e au
ditin
g fir
ms h
ave,
in d
iscip
lines
such
as
info
rmat
ion
tech
nolo
gy, a
nd p
erm
it B
MA
to
allo
cate
its e
xam
inat
ion
reso
urce
s stil
l mor
e ef
ficie
ntly
.
CP
22 R
emed
ial m
easu
res
Legi
slatio
n pr
ovid
ing
the
BM
A w
ith m
ore
dire
ct
inte
rven
tion
tool
s in
the
even
t of a
n im
pend
ing
bank
failu
re sh
ould
be
enac
ted
by th
e B
erm
uda
gove
rnm
ent.
The
BM
A sh
ould
als
o co
nsid
er c
omm
unic
atin
g ex
amin
atio
n re
sults
and
eff
orts
to e
nfor
ce
com
plia
nce
with
the
prud
entia
l man
ner s
tand
ards
to
eac
h ba
nk’s
boa
rd o
f dire
ctor
s or i
ts a
udit
com
mitt
ee.
The
auth
oriti
es h
ave
been
car
eful
ly re
view
ing
the
optio
ns fo
r enh
anci
ng th
e to
ols a
vaila
ble
to d
eal w
ith
such
a si
tuat
ion.
Fol
low
ing
the
mis
sion
BM
A
indi
cate
d th
at it
is p
repa
ring
a co
nsul
tativ
e pa
per t
hat
will
pro
pose
the
incl
usio
n of
new
mec
hani
sms i
n th
e B
DC
A.
Insp
ectio
n re
ports
, inc
ludi
ng fi
ndin
gs a
nd
reco
mm
enda
tions
, are
now
form
ally
add
ress
ed to
ea
ch b
ank’
s boa
rd o
f dire
ctor
s.
60
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
IOSC
O O
bjec
tives
and
Pri
ncip
les o
f Sec
uriti
es R
egul
atio
ns
Prin
cipl
es R
elat
ing
to th
e R
egul
ator
(P 1
–5)
Rem
ove
BM
AA
aut
horit
y gi
ven
to th
e M
OF
to
dire
ct th
e B
MA
.
Gra
nt B
A b
udge
tary
aut
onom
y.
Cre
ate
a se
para
te in
tern
al p
roce
ss fo
r rep
ortin
g un
der t
he e
mpl
oyee
cod
e of
con
duct
.
The
auth
oriti
es h
ave
not s
een
a ne
ed to
impl
emen
t an
y ch
ange
in th
e le
gisl
atio
n. T
he p
rovi
sion
in th
e B
MA
Act
doe
s not
em
pow
er th
e m
inis
ter t
o gi
ve
dire
ctio
ns to
the
BM
A in
rela
tion
to in
vest
men
t su
perv
isio
n. S
ectio
n 21
(2) o
f the
BM
A A
ct, w
hich
pr
ovid
es fo
r min
iste
rial d
irect
ions
to th
e B
MA
, has
to
be
read
in c
onte
xt. T
he su
bsec
tion
is c
onta
ined
in
the
sect
ion
deal
ing
with
the
BM
A’s
rela
tions
with
go
vern
men
t. U
nder
that
sect
ion
the
BM
A is
giv
en
func
tions
of a
dvis
or to
the
min
iste
r and
age
nt fo
r th
e go
vern
men
t. Th
ose
area
s fal
l out
side
the
scop
e of
regu
lato
ry a
cts.
Con
sequ
ently
, any
dire
ctio
n th
at
the
min
iste
r giv
es u
nder
that
subs
ectio
n co
uld
only
be
in re
latio
n to
thes
e ar
eas a
nd n
ot in
rela
tion
to
supe
rvis
ory
func
tions
of t
he B
MA
.
Follo
win
g ca
refu
l rev
iew
, no
chan
ges t
o th
e B
MA
’s
budg
etar
y pr
oces
s hav
e be
en d
eter
min
ed b
y go
vern
men
t to
be n
eces
sary
. It s
houl
d be
not
ed th
at
the
BM
A's
prop
osed
exp
endi
ture
bud
gets
hav
e ne
ver b
een
refu
sed
or re
stric
ted
by th
e m
inis
ter.
The
BM
A a
men
ded
the
staf
f han
dboo
k Pe
rson
al
Dea
ling
Rul
es a
nd P
roce
dure
s in
Janu
ary
2006
with
re
ports
now
bei
ng su
bmitt
ed to
the
Dire
ctor
, Leg
al
Serv
ices
and
Enf
orce
men
t.
Prin
cipl
es fo
r th
e E
nfor
cem
ent o
f Sec
uriti
es
Reg
ulat
ion
(P 8
–10)
Im
prov
e au
thor
ity to
insp
ect c
olle
ctiv
e in
vest
men
t sc
hem
es.
Cre
ate
auth
ority
to sa
nctio
n is
suer
s and
trad
ing
syst
ems.
New
prim
ary
fund
legi
slat
ion
has b
een
intro
duce
d.
This
legi
slat
ion,
am
ong
othe
r pro
visi
ons,
prov
ides
fu
ll po
wer
s of i
nfor
mat
ion
gath
erin
g an
d in
spec
tion,
whi
ch a
re c
onsi
sten
t with
thos
e of
the
IBA
200
3.
This
reco
mm
enda
tion
has b
een
addr
esse
d un
der t
he
IBA
200
3 Pa
rt IV
. It e
stab
lishe
s a fr
amew
ork
for
61
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
the
reco
gniti
on a
nd re
gula
tion
of re
cogn
ized
in
vest
men
t exc
hang
es a
nd c
lear
ing
hous
es b
y th
e B
MA
. The
BM
A h
as th
e po
wer
to g
ive
dire
ctio
ns
or re
voke
reco
gniti
on in
cer
tain
circ
umst
ance
s.
Prin
cipl
es fo
r Is
suer
s (P
14–1
6)
Gra
nt B
MA
aut
horit
y an
d re
spon
sibi
lity
for
regu
latin
g al
l pub
lic is
suer
s inc
ludi
ng re
view
of
pros
pect
uses
and
on-
goin
g m
onito
ring
of
cont
inuo
us d
iscl
osur
e.
Dev
elop
insi
der t
rade
repo
rting
requ
irem
ents
and
sy
stem
of t
rans
pare
ncy
for i
nsid
er a
ctiv
ity.
Dev
elop
rule
s rel
ated
to ta
ke-o
ver b
ids,
mer
gers
, ch
ange
s of c
ontro
l and
rela
ted
party
tran
sact
ions
.
Issu
es o
f non
-list
ed se
curit
ies a
re e
xtre
mel
y ra
re in
B
erm
uda.
The
aut
horit
ies a
re st
ill c
onsi
derin
g th
e be
st a
ppro
ach.
The
role
of t
he B
SX, i
nclu
ding
its
revi
ew o
f lis
ted
offe
rings
, is n
ow fu
lly w
ithin
the
ambi
t of t
he IB
A fr
amew
ork.
An
insi
der r
epor
ting
regi
me
has y
et to
be
impl
emen
ted
by th
e B
SX. D
irect
ors o
f BSX
do
mes
tic c
ompa
nies
are
, how
ever
, req
uire
d to
stat
e in
the
com
pany
’s a
nnua
l acc
ount
s the
agg
rega
te
num
ber o
f sha
res h
eld
by th
emse
lves
and
by
the
com
pany
’s o
ffic
ers.
This
is n
ot a
prio
rity
give
n th
e si
ze o
f the
dom
estic
m
arke
t and
low
inci
denc
e of
take
over
bid
s. Th
e au
thor
ities
are
revi
ewin
g w
hat a
ppro
ach
to ta
ke in
th
e m
ediu
m-te
rm.
Prin
cipl
es fo
r C
olle
ctiv
e In
vest
men
t Sch
emes
(P
17–
20)
Furth
er d
evel
op st
aff t
echn
ical
skill
s for
in
spec
tions
.
Dev
elop
add
ition
al g
uida
nce
for c
olle
ctiv
e in
vest
men
t sch
emes
with
resp
ect t
o lic
ensi
ng a
nd
cond
uct r
equi
rem
ents
, sec
uriti
es le
ndin
g,
segr
egat
ion
of a
sset
s, ca
lcul
atio
n an
d pu
blic
atio
n of
net
ass
et v
alue
, and
rede
mpt
ions
.
With
the
intro
duct
ion
of th
e IF
A, t
he B
MA
has
als
o es
tabl
ishe
d a
dedi
cate
d In
vest
men
t Fun
ds T
eam
he
aded
by
a pr
inci
pal w
ith o
ver 1
0 ye
ars o
f fun
d ad
min
istra
tion
indu
stry
exp
erie
nce
and
supp
orte
d by
a
seni
or a
naly
st a
lso
with
dire
ct in
dust
ry e
xper
ienc
e.
The
first
Fun
d A
dmin
istra
tion
licen
ce w
as is
sued
in
June
200
7 w
ith n
ew li
cenc
es e
xpec
ted
to b
e is
sued
du
ring
a w
indo
w e
ndin
g in
Mar
ch 2
008.
It is
the
BM
A’s
inte
ntio
n to
con
duct
star
t-up
on-s
ite re
view
s fo
r all
new
lice
nces
with
in 1
2 m
onth
s of l
icen
sing
.
We
have
dev
elop
ed a
nd im
plem
ente
d ne
w p
rimar
y le
gisl
atio
n w
hich
, am
ong
othe
r mat
ters
, pro
vide
s fo
r fun
d an
d pr
ospe
ctus
rule
s. In
itial
fund
and
62
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
pros
pect
us ru
les h
ave
been
intro
duce
d an
d th
e ne
ed
for t
hese
to b
e de
velo
ped
furth
er a
nd re
fined
is k
ept
unde
r reg
ular
revi
ew.
Prin
cipl
es fo
r M
arke
t Int
erm
edia
ries
(P 2
1–24
) G
rant
BM
A c
lear
er in
spec
tion
right
s.
Dev
elop
staf
f tec
hnic
al sk
ills f
or in
spec
tions
.
Dev
elop
a c
ontin
genc
y pl
an fo
r fai
lure
of a
n in
term
edia
ry.
Con
side
r car
ryin
g ou
t on-
site
pru
dent
ial
insp
ectio
ns o
f fin
anci
al c
ondi
tions
for f
irms
hand
ling
clie
nt a
sset
s.
Cle
arer
insp
ectio
n rig
hts h
ave
been
gra
nted
to th
e B
MA
with
the
intro
duct
ion
of th
e ne
w IB
A 2
003.
Follo
win
g th
e la
st IM
F in
spec
tion
in 2
003
the
BM
A
has r
evis
ed it
s ins
pect
ion
prog
ram
for I
BA
lice
ncee
s to
pro
vide
cle
arer
gui
danc
e fo
r ins
pect
ions
.
The
BM
A h
as c
ontin
ued
to u
se b
oth
inte
rnal
and
ex
tern
al tr
aini
ng so
urce
s to
incr
ease
exi
stin
g st
aff
tech
nica
l sec
uriti
es in
dust
ry k
now
ledg
e an
d ha
s als
o fo
cuse
d re
crui
tmen
t to
ensu
re th
at th
ere
is su
ffic
ient
te
chni
cal e
xper
tise
with
in th
e re
leva
nt te
am. B
TI h
as
recr
uite
d tw
o C
FA c
harte
rhol
ders
and
is su
ppor
ting
anot
her s
taff
mem
ber i
n th
eir p
ursu
it of
this
de
sign
atio
n. T
here
are
ver
y lo
w le
vels
of t
radi
ng in
ou
r dom
estic
mar
ket a
nd a
s suc
h, th
e de
velo
pmen
t of
such
a p
lan
is n
ot a
hig
h pr
iorit
y.
The
BM
A c
ontin
ues t
o pa
y cl
ose
atte
ntio
n to
m
anag
emen
t inf
orm
atio
n on
inve
stm
ent p
rovi
ders
’ fin
anci
al c
ondi
tion,
whi
ch is
rece
ived
regu
larly
fr
om a
ll lic
ence
es, i
nclu
ding
thos
e w
here
aud
ited
finan
cial
stat
emen
ts a
re n
ot re
quire
d.
Prin
cipl
es fo
r th
e se
cond
ary
mar
ket (
P 25
–30)
In
crea
se o
vers
ight
of c
lear
ing
and
settl
emen
t sy
stem
s.
Dev
elop
staf
f ski
lls w
ith re
spec
t to
clea
ring
and
settl
emen
t and
trad
ing
syst
ems.
Fully
dem
ater
ializ
e se
curit
ies.
Dev
elop
stan
dard
s for
per
form
ance
and
risk
m
anag
emen
t of c
lear
ing
and
settl
emen
t sys
tem
s.
Crim
inal
ize
insi
der t
radi
ng a
nd m
arke
t
The
intro
duct
ion
of th
e IB
A 2
003
has g
rant
ed th
e B
MA
for t
he fi
rst t
ime
the
auth
ority
to li
cens
e an
d su
perv
ise
clea
ring
and
settl
emen
t sys
tem
s. A
t thi
s tim
e on
ly th
e B
SX is
pro
vidi
ng su
ch a
syst
em in
B
erm
uda
and
volu
mes
rem
ain
low
. In
the
case
of t
he
Ber
mud
a Se
curit
ies D
epos
itory
on-
goin
g su
perv
isio
n is
com
bine
d w
ith th
at o
f the
BSX
, w
hich
ope
rate
s the
syst
em.
The
prin
cipa
l hea
ding
the
team
resp
onsi
ble
for t
he
63
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
man
ipul
atio
n.
supe
rvis
ion
of th
e B
SX a
nd B
SD is
a C
FA h
olde
r w
ith a
dec
ade
of tr
adin
g an
d se
curit
ies e
xper
ienc
e.
In a
dditi
on se
vera
l mem
bers
of B
TI st
aff h
ave
visi
ted
the
BSX
to fa
mili
ariz
e th
emse
lves
with
the
oper
atio
n of
the
exch
ange
and
the
BSD
.
Sinc
e th
e fir
st v
isit
by th
e IM
F te
am to
the
BSX
all
dom
estic
secu
ritie
s hav
e be
en m
ade
depo
sito
ry
elig
ible
and
can
onl
y be
trad
ed o
n th
e B
SX if
fu
ngib
le d
e-m
ater
ializ
ed p
ositi
ons a
re h
eld
with
in
the
Ber
mud
a Se
curit
ies D
epos
itory
. Nei
ther
the
BSX
nor
any
Ber
mud
a ba
sed
regu
lato
r can
forc
e a
shar
ehol
der t
o de
-mat
eria
lize
a se
curit
y po
sitio
n un
der c
urre
nt le
gisl
atio
n bu
t it i
s fel
t tha
t the
cur
rent
si
tuat
ion
prov
ides
a re
alis
tic a
nd m
oder
n ap
proa
ch
to th
is is
sue.
The
BSX
trad
ing
engi
ne (B
EST)
will
not
per
mit
an
orde
r to
ente
r the
mar
ket p
rior t
o ch
ecki
ng th
e fu
ngib
ility
of a
pos
ition
in th
e de
posi
tory
.
Cur
rent
ly, o
ver 3
4 pe
rcen
t of a
ll sh
ares
issu
ed a
nd
outs
tand
ing
for d
omes
tic li
sted
issu
ers a
re d
e-m
ater
ializ
ed a
nd lo
dged
with
in th
e B
SD.
This
per
cent
age
with
in th
e B
SD is
in li
ne w
ith th
e pe
rcen
tage
of s
ecur
ities
lodg
ed in
cen
tral
depo
sito
ries i
n m
ost m
atur
e ju
risdi
ctio
ns.
At t
his t
ime
ther
e is
no
requ
ired
repo
rting
of
settl
emen
t fai
lure
s and
ther
e is
no
insp
ectio
n pr
ogra
m fo
r the
cle
arin
g an
d se
ttlem
ent s
yste
m. N
o sp
ecifi
c re
quire
men
ts o
r per
form
ance
stan
dard
s ha
ve b
een
set f
or th
e sy
stem
.
The
Crim
inal
Cod
e A
men
dmen
t Act
200
4 in
trodu
ced
the
offe
nce
of m
arke
t man
ipul
atio
n an
d in
side
r dea
ling.
64
Ref
eren
ce P
rinc
iple
s R
ecom
men
datio
ns
Act
ions
as o
f 200
7
R
esol
ve c
ash
acco
unt r
isk.
It
is th
e B
SX’s
pos
ition
that
the
mai
nten
ance
of
paym
ent a
ccou
nts a
long
with
insu
ranc
e co
vera
ge a
t th
e in
divi
dual
firm
leve
l miti
gate
syst
emic
se
ttlem
ent f
ailu
res.
The
BSX
requ
ires t
hat c
ash
and
secu
ritie
s hel
d on
be
half
of c
lient
s are
hel
d in
a fu
lly se
greg
ated
ac
coun
t fro
m th
at o
f the
firm
. Thi
s is i
ndus
try
prac
tice.
The
BSX
is o
f the
opi
nion
that
this
se
para
tion
of a
sset
s is a
ver
y cl
ear r
ing
fenc
e fo
r cu
stom
ers’
fund
s in
the
even
t of a
fina
ncia
l cris
is a
t a
mem
ber f
irm.
The
BM
A is
wor
king
with
the
BSX
to st
reng
then
its
unde
rsta
ndin
g an
d ef
fect
ive
over
sigh
t of t
he
exch
ange
, as p
art o
f whi
ch le
gal i
ssue
s ove
r the
st
atus
of c
olla
tera
l and
gua
rant
ees w
ill b
e re
view
ed.
65
Annex IV. Authorities’ Responses to Key Recommendations
Recommendation Response Bermuda Monetary Authority
The Authority has already made a considerable effort and progress in increasing skilled staff. However, to meet the standard it has set itself of becoming a leading regulator, the Authority must continue to work to attract and retain a range of skilled staff.
The Authority has been in a period of significant growth in staffing resources and has targeted further increases in supervisory and other resources for the remainder of 2008. These efforts have meant we have increased the size of our insurance and banking, trust and investment supervisory teams; have developed an independent risk and policy unit; have set up a dedicated insurance run-off team and have created an in-house actuarial unit. The Authority is making a significant investment in learning and development in its staff with a multi-tier program of core, intermediate, and specialist training and sponsored study and accreditation Insurance
The Authority should periodically review its relationship with industry to preserve regulatory independence.
The Authority values maintaining a strong working relationship with its external stakeholders in the various segments of the insurance industry. We will shortly publish a statement of policy on our approach to consultation with industry to set out a transparent framework for engaging with stakeholders on legislative and regulatory change. In our supervisory operations, our increased resources and enhanced on-site risk assessment and solvency frameworks allow the Authority to engage in a challenging dialogue with individual firms. The Authority has implemented other measures to enhance transparency around its independence, including overhauling its licensing process, restructuring to a dedicated Licensing and Assessment Team and related governance structures, with an advisory role for industry subordinate to decision-making by Authority staff.
Supervisors should proceed, as planned, to implement the full rollout of the new supervisory framework .
Since the IMF assessment, the Authority has made further progress in the roll out of its supervisory program for insurance, including further on-site assessment, enhanced solvency standards, and specialist risk reviews. Our 2008–09 Business Plan sets out the BMA’s road-map to implement the remaining elements of the framework. The Authority has drafted legislation, expected to be tabled in the Legislature in June 2008, that subdivides the heterogeneous Class 3 sector to facilitate the new supervisory framework to the entire commercial market.
The insurance department should formulate a pragmatic approach, and start closer cooperation with other authorities in order to implement group supervision, given the global systemic nature of the companies headquartered in Bermuda.
The Authority’s existing risk-based framework allows it to assess group governance, controls and risk management arrangements as part of its solo supervisory monitoring. The Authority’s 2008–2009 Business Plan sets out our intention to publish a discussion paper on insurance group supervision in the first quarter of 2009 and to move to implement a group supervision framework by 2011. In the meantime, the Authority is hosting a number of supervisory colleges to facilitate supervisory cooperation on our largest insurance companies.
66
Recommendation Response The Authority should enhance transparency about companies, including through implementation of the IAIS standard on disclosure
Following the IMF assessment, the Authority has introduced a requirement for Class 4 insurance companies to publish their GAAP accounts. The Authority will consult on extending this requirement to the largest Class 3 companies and on further types of disclosure. The Authority is also in the process of reviewing and considering the appropriateness of other risk disclosures to enhance transparency.
As part of the staffing mentioned above, the Authority will need specialized resources to validate the risk management models of, and communicate effectively with, the companies.
The Authority has already taken steps to improve our specialist risk management resources through the formation of an in-house actuarial team and a separate risk and policy unit. We will continue to build our capability in this area, through a combination of additional recruitment, outsourcing and training of existing staff.
Banking Legislation should be enacted to provide the Authority with more direct intervention tools in the case of a troubled bank.
The Authority currently has a wide range of intervention powers for banks. We will however review the detailed recommendations in this area to assess whether further enhancements are required.
AML/CFT Update legislation and regulations, and amend procedure and implementation as detailed in the AML/CFT ROSC.
The Legislature enacted AML legislation in the summer of 2007. This comprised the Proceeds of Crime (Amendment) Act 2007: the Financial Intelligence Agency Act 2007; and the Criminal Justice International Cooperation (Bermuda) (Amendment) Act 2007. Since then, the Bermuda authorities have continued to work on further enhancing the jurisdiction’s AML/CFT framework, and have prepared additional primary and secondary legislation further amending the Proceeds of Crime Act 1997, the Anti-Terrorism (Financial and Other Measures) Act 2004, and new regulations to replace the Proceeds of Crime (Money Laundering) Regulations 1998. We expect that two bills (Proceeds of Crime (Amendment) Bill 2008 and the Anti-Terrorism (Financial and Other Measures) (Amendment) Bill 2008 will be tabled in the House in July and enacted before the end of that month. The Authority is currently involved in market consultation with respect to a third bill expected to be tabled in the November 2008 Parliamentary session. In anticipation of the bill being enacted, the Authority has issued draft guidance notes for consultation. The bill is expected to broaden the scope of entities falling within the new AML/ATF Regulations and expand the mandate of the Authority in its supervision and monitoring of financial institutions for compliance with AML/CFT requirements.