Bermuda Achieves Solvency II Equivalency
As of March 24, 2016, Bermuda was officially granted Solvency II third-country equivalency. The European Union (EU) considers the island’s insurance regulation standards for commercial insurers to be equivalent to their own. In the works for six years, reaching this goal was a significant achievement for the Bermuda Monetary Authority (BMA), Bermuda’s financial services regulator, and industry leaders on the island.
The Solvency II Directive, which became fully applicable on January 1, 2016, is somewhat similar to the Basel II banking regulations in that the Solvency II framework has three main pillars that lay out requirements for insurance companies in the EU. When the directive was initially introduced, the European Commission (EC) signaled that captive insurance companies would be included within its scope.
Bermuda has a very large commercial (re)insurance market (by which we refer to the general and life (re)insurance markets), approximately 40% of which is made up of European business. If those commercial insurance and reinsurers could no longer (re)insure business from Europe it would have had a major impact on the island.
Bermuda as a whole required equivalency, and through education and outreach efforts with the EC was able to demonstrate that the island already had specific regulations in place for the insurance market and a separate set of regulations specific to captives. In the end, the EC recognized such by granting equivalency for the commercial market space without the need for the captive sector to follow.
What Does Equivalency Mean for Captive Owners?
There is no impact on captives based in Bermuda. The Bermuda Monetary Authority confirmed that Bermuda will not be applying a Solvency II-type regime to captives and has effectively been permitted to have a segmented market approach to insurance regulations between the captive industry and the commercial (re)insurance market, the latter market having a Solvency II equivalent regulatory regime in place.
Generally, Bermuda-based captives still can’t write directly into Europe, but they can be used to reinsure risks from European captive programs. The benefit to the commercial (re)insurance market is that equivalency means the market can effectively act as EU approved (re)insurers. With the approval now in place, it is expected that Bermuda will see more of these transactions as well as new company formations. It is now clear that (re)insurers based in Bermuda will not face any competitive disadvantage when doing business in the EU.