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BMA proposal for a more robust investment risk management framework, with stronger investment-specific governance.
Contents
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Who is in scope?
Commercial (re)insurers and group entities registered in Bermuda and their outsourced asset managers, whether affiliated or external third parties.
The proposed governance applies to situations where the assets are governed under the law of the ceding jurisdiction, but the Bermuda registered entity has the economic exposure assets.
In particular, insurers with investment strategies that include illiquid, hard-to-value non-publicly traded assets should expect ongoing BMA supervisory scrutiny.
PPP embeds investment activity into the broader ERM framework.
Key concepts
The existing PPP framework requires the (re)insurers to ensure investment decisions have been executed in the best interest of the policyholders, by only investing in instruments that a reasonable individual who aims for capital preservation and return on investment would consider owning.
The proposal raises the due diligence bar, by expanding the risk management framework regulatory expectations in areas such as: accountabilities, conflict of interest, risk understanding and transparency, among others.
Accountability for implementing the PPP is explicitly attributed to the board, senior management, and control functions.
Timelines
Following the consultation process, the changes are expected to result in consequential adjustments to the Code in relation to Prudent Person Principle (PPP).
It is proposed for the changes to enter into force on the 1st of July 2025.
Disclosure process
After 1st of July 2025, CISSAs/GSSAs should evidence and attest to the application of PPP and the considered impact of solvency and liquidity.
CISSA/GSSA impact
As the standard capital charges may be less suited to measure the risk of certain investments, the BMA expects the (re)insurers to self-assess the appropriateness of the standard capital charges, following the (re)insurers’ implementation of the governance process in the application of PPP.
Insurers should only invest in assets whose risk they can correctly identify, measure, monitor, manage, control and report on, e.g. monitoring adherence to investment limits.
Insurers should carry out holistic due diligence to ensure an adequate understanding and expertise regarding complex and non-publicly traded investments exists, e.g. sufficient expertise should exist to independently value non-publicly traded investments, to measure valuation uncertainty.
Conflict of interest should be fully identified and mitigated in a manner that is in the best interest of policyholders, e.g. the role and input of the asset manager into the valuation process.
Both balance sheet and off-balance sheet investments are subjected to heightened transparency, e.g. ability to look-through and consistently monitor and report on.
The BMA expects the Board to devote attention to specific areas, e.g. setting and overseeing the investment strategy, incl. setting risk appetite, disclosure of affiliated and related party exposure.
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Authors
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Andrew Howie Andrew is Head of Advisory for Grant Thornton in Bermuda having moved to the island in 2022. He is leading a team of specialists who are providing a broad range of advisory services to clients in the region.View Profile -
Ramona Scutelnicu Ramona is a Director, Head of Risk in Grant Thornton Bermuda. Ramona brings over 15 years of leadership and industry experience across Risk and Actuarial.View Profile