Changes in paradise How new Bermudan regulation will affect Hong Kong insurers
For years Bermuda has been the off-shore domicile of choice for insurance companies in Hong Kong and elsewhere in Asia. A combination of low tax rates, good business support infrastructure and light-touch regulation make the island an attractive location. However, some of this is about to change, which will have major implications for many insurers. Timelines are short, and firms need to act quickly. Over the past few years Bermuda has been working with the EU to obtain equivalence status with Solvency II. To achieve this status, the Bermudan government and the Bermudan Monetary Authority (BMA, the regulator) changed the legislation and regulations under which insurers are governed on the island. These changes came into effect on 1 January 2016. Insurers should expect: ►
More governance requirements
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More oversight and engagement from the regulator
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Enhanced methodologies for valuation and capital requirements, which will be new for insurers not currently running Economic Capital or Market consistent models
Previously Hong Kong based and other foreign insurers were given official or unofficial exemptions from the BMA’s regulation in Bermuda. That era is now over.
What are your options? Insurers are faced with two choices: ►
Re-domicile to Hong Kong or elsewhere
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Comply with the new regulations
Either of these courses of action involves a significant program of work, particularly for many of the mediumsized insurance companies involved. Domicile changes must be approved by the Hong Kong regulator, which is itself about to undergo a fundamental change with the formation of the Independent Insurance Authority (IIA). Approval depends (amongst other things) on the opinion of an independent actuary.
Besides the regulatory process, the project would also involve:
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Corporate activity (setting up new companies/vehicles)
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Legal advice
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Tax issues
Based on prior experience, we estimate that it could take between nine and 18 months to complete the transfer. ►
The move to modernize Hong Kong’s prudential regime through Hong Kong Risk Based Capital (HK RBC) means this option would only be a temporary solution. Modern valuation and risk management requirements are coming, no matter where you are domiciled.
Governance requirements: Insurers domiciled in Bermuda will now need to demonstrate to the BMA they are “managed and directed” from the island. There are a number of criteria which determine whether or not an insurer satisfies this criterion, including where board meetings are held, where significant decisions are taken, and whether directors or senior officers live in Bermuda. Disclosure requirements: Insurers will need to publicly file GAAP accounts, and will need to file statutory accounts with the BMA privately. The format of the filing will be substantially different from the current form and will need to be signed off by the Appointed Actuary.
The alternative is to comply.
What are the timelines?
What are the key changes?
The new legislation came into effect on 1 January 2016. This means insurers must comply with the governance standards immediately, although we understand the BMA is taking a pragmatic attitude.
At the most fundamental level, the key change is that the BMA will no longer turn a ‘blind eye’ to foreign insurers domiciled on the island. All insurers will need to comply with the new regime or face regulatory sanction.
The quantitative and disclosure requirements are being tested through a “dry run” in 2016, with a deadline at the end of April. The BMA is allowing companies some leeway in this deadline, on a case-by-case basis. Companies which cannot do the calculations currently must submit a gap analysis by mid-year, with full live submission happening from April 2017 onward (based on the year-end 2016 position).
Following the three-pillar structure of Solvency II, highlights of the specific changes are: ►
Quantitative capital requirements: Insurers will need to calculate risk-based capital requirements by applying stresses to an Economic Balance Sheet (EBS) model. The EBS will be valued using market consistent techniques, similar to Solvency II in principle, but different in some details.
Figure 1 below summarizes the timeline. Dec 2014 BMA issued “Consultation Paper on the EBS Framework 1 May 2015 BMA launches 1st assessment based on draft prudential rules
Company Action
BMA Action
1 June 2015 BMA reviews EBS trial run submissions and feedback from industry
30 Sept 2015
BMA published prudential rules in final form. These rules become effective on 1st Jan 2016 with transitional provisions
29 May 2015
1 Jan 2016
30 June 2016
April 2017
Submission of the 1st assessment
Report on EBS basis for financial years beginning on or after this date. Transitional arrangements in place for technical provisions for existing business only
Submission of Gap Analysis
Full live submission of EBS and BSCR on an EBS basis Transitional arrangements in place for technical provisions for existing business only
30 April 2016 Mandatory EBS trial run submission (including technical provisions and BSCR on an EBS basis)
Changes in paradise
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What should you do now?
EY experience
As a first step we recommend getting in touch with the BMA to clarify your situation and secure an extension of the dry-run and gap analysis deadlines.
EY is a global network of advisory member firms, with experience in insurance regulation, accounting, tax and strategy. We have the largest consulting team of insurance professionals in Hong Kong, and maintain a significant presence in Bermuda, including experts in regulation and life insurance.
Next you should decide whether to stay in Bermuda or redomicile elsewhere. Whichever choice of action you take, the next step is to quickly plan out requirements and engage advisors. If you intend to stay on the island, you will need a gap analysis of your current processes and capabilities against the new requirements. Even those insurers who currently use Economic Capital (EC) type models will need to add work streams to their current reporting cycles and assess the information needed in the new filings. Others will need to fundamentally change their actuarial systems.
Our proposal to clients on this subject is based on the following unique qualifications: ►
We urge insurers affected to move quickly: timelines are short, and the amount of work is significant. ►
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Changes in paradise
We have outstanding, Bermuda specific, industry experience: We bring the advantage of having served the Bermuda International Long Term Insurers and Reinsurers Association (BILTIR) and the Association of Bermuda Insurers and Reinsurers (ABIR) on matters regarding the recent Bermudan regulatory change. Both engagements involved unparalleled access to the BMA, and you will benefit directly from the insight gained and the relationships we have. We are a highly globally integrated organization: One aspect that consistently sets us apart from competitors, particularly in locations such as Bermuda, is how we work internationally. EY is set up so that we deliver tailored experience, wherever in the world it is needed. In particular, our team here in Hong Kong works together closely with our counterparts in Bermuda. We have specific experience: We are currently executing a gap-analysis project for one of the largest insurers in Hong Kong, to assess their readiness to comply with the BMA requirements. As well as this specific experience, we have executed many similar projects covering regulatory change including for Solvency II in Europe and for GN16 and other regulations in Hong Kong.
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Contact us Jonathan Zhao Asia-Pacific Insurance Leader +852 2846 9023
[email protected] Tze Ping Chng Partner, Actuarial & Insurance Advisory Services +852 2849 9200
[email protected] Phil Joubert Director, Actuarial & Insurance Advisory Services +852 9010 5681
[email protected] Brendan Kerr Director, Actuarial & Insurance Advisory Services +852 2629 3038
[email protected]
EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
© 2016 Ernst & Young, China. All Rights Reserved. APAC No. 03003128 ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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