New insurer class to assist further development of Bermuda’s insurance-linked securities industry

Despite competition from other jurisdictions, Bermuda continues to be the domicile of choice for alternative capital capacity, with more than half of the share of the global alternative capital market. The ‘Special Purpose Insurer’ (SPI) class and the use of ‘Class 3’ segregated accounts companies have been central to this success. With an eye to further expand and innovate, the Bermuda Monetary Authority (BMA) is consulting on a new insurer class that will further cement the position of the jurisdiction as the leading domicile for insurance-linked securities (ILS).


When the SPI class was established in 2009, the majority of transactions were simple, limited duration catastrophe bonds. Since then, Bermuda’s ILS’ sector has experienced phenomenal development and now, SPI and Class 3 licensing structures have evolved to suit a wider and more complex range of business types. These include industry loss warranties, mortgage books and general property quota share.

Nevertheless, the BMA has identified an appetite to use alternative capital for more complex risks (such as longer tail and retrospective business, swaps and direct business), with a wider variety of cedants (including unrated, unaffiliated cedants) and involving greater use of contingent capital.

The BMA considers that SPIs and Class 3 insurers are not suitable vehicles for these more complex structures. It has determined that a new class is called for, one with a licensing regime that is more proportionate than that applicable to commercial insurer classes but which is better suited to the higher and more complex risk profiles of the newer type of structures than applicable to SPIs and Class 3 insurers.

BMA consultation

On 14 May 2019, the BMA published a consultation paper on (amongst other things) a regulatory regime for a new class of limited purpose insurer - a fully-collateralised reinsurer class (CI).

‘Collateralised insurer’ class

CIs would meet the demands for a more flexible approach to capital and for a wider variety of cedant and product-type. Under the proposals, capital may be a combination of paid-in and contingent capital (such as letters of credit and reinsurance), depending on the specifications of the inwards business, cedants may be unaffiliated unrated entities and product types may include more complex risks.

The wider product ambit and more flexible rules on capital mean that CIs would have a higher operational risk profile than SPIs and Class 3 insurers and, depending on the capital used, market and credit risks that are not inherent in the traditional structures written through SPIs and Class 3 insurers. To address this, the consultation paper proposes risk-based regulatory capital requirement for CIs mitigating operational risk subject to a floor of BD$250,000.

The risk-based capital requirement would be tuned to the results of a Commercial Insurer Risk Assessment, which will be customised for CIs, with a proposed capital charge of between 0.05% and 0.88% of total assets held as collateral on the statutory balance sheet date. This charge could be reduced by up to 50% by deducting the adjusted limits of any E&O indemnity coverage that the CI has purchased from an insurer rated A- or higher by AM Best or a similar agency.

Where the limits of liability under inwards reinsurance policies do not flex with impairments of assets held as collateral, additional permanent capital will be required to absorb the resultant market and reinsurance credit risks at 99% tail value-at-risk over a one-year time horizon. However, this will not be needed where the collateral is cash and cash equivalents, or, where contingent capital is used, there is a cut-through clause supported by a high-rated entity.

CIs would need to meet the head office requirements under the Insurance Act that are applicable to commercial insurers. Furthermore, where a CI is determined to be a ‘lead insurer’ of a complex Bermuda-based insurance group, it may be required to be licensed as a Class 3A or higher commercial class to engage the group supervision jurisdiction of the BMA.


The feedback period for the consultation paper closed on 12 June 2019. Legislative amendments necessary to implement the proposals are expected to follow, after which many participants will no doubt look to take full advantage of the opportunities presented by this interesting new insurer class.

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