Navigating Bermuda’s New Rules: A Smarter Path for Actuaries

Estimated Reading Time: 5 minutes

Ever wondered how Bermuda’s insurance regulations are shaping the future of actuarial work? I did too. So, I turned to someone who knows this space inside and out – Dan Kim.

Dan is the Head of Annuity at Talcott Resolution and a leader in valuation and regulatory work. He’s not just a friend but also a collaborator. We’ve worked on cutting-edge AI tools for actuaries and even presented together at the Society of Actuaries’ ValAct conference recently.

When I asked Dan to share his insights on Bermuda’s evolving framework, he didn’t disappoint. His experience and perspective bring clarity to a complex and fascinating topic.

Get ready for a deep dive into the world of Bermuda’s insurance regulations – and what they mean for actuaries like you. I promise you’ll come away with a fresh perspective on the challenges and opportunities ahead.

Introduction

I am a valuation actuary who has been in the industry for about 20 years. My current role includes financial reporting for entities domiciled in Bermuda. I want to share recent trends of the long-term insurance reporting framework and my take on their meaning for actuaries. In short, the new framework requires actuaries to be more involved in considering the economics between assets and liabilities, which is a crucial part of insurance business management. It also requires actuaries and management to be more accountable for developing complex reality and business strategies into simple models, methodologies, and assumptions. While it can be more demanding and challenging, it is more rewarding to be more involved and have more accountability in solving complex problems. It also creates a good environment for actuaries to continue to learn the insurance business.

Complexity of insurance business

We can never be perfectly accurate in predicting future financial markets, such as interest rates. We can do our best to estimate the potential ranges and/or reflect values that may be consistent with the current financial market prices. Insurance cash flows, usually lacking a liquid market, need actuarial modeling with actuarial judgments. The complexity also relates to management actions, especially investment management activities that react to liability cash flows and policyholder behaviors that react to the financial market or other external factors. The insurance business is a complex system that is impossible to predict with 100% accuracy. Yet, the business is inherently in the prediction business as the policyholder’s funds are reserved for preparing for future uncertain events.

The Bermuda regulatory framework requires modeling the complexity of asset and liability interactions, especially for scenario based approach best estimate liabilities. Let’s explore the Bermuda requirements further.

Background of the Bermuda reporting framework

Bermuda's insurance regulatory regime requires capital to be evaluated on an economic basis through the Economic Balance Sheet (“EBS”) Framework. The EBS is to be developed on a fair value principle for both assets and liabilities. The main component of insurance liability is called technical provisions, which are comprised of best estimate liabilities (“BEL”) and risk margin.

BEL can be developed using either standard approach or scenario based approach (“SBA”). Standard approach is a present value of liability cash flows discounted at a curve prescribed by the Bermuda Monetary Authority (“BMA”). SBA is developed by calculating the amount of market value of assets to fulfill future liability cash flows at a moderately adverse interest rate scenario. Insurers are motivated to use SBA since it can reflect economic reality better, which could potentially lead to lower amount compared to the standard approach.

Recent change

The BMA published a couple of consultation papers (CP1 and CP2) in 2023 and Insurance (Prudential Standards) Amendment Rules in 2024 to enhance the current framework. The main areas relate to SBA.

Some of the main drivers of the enhancements are related to the evolving nature of the insurance business in Bermuda. As asset-intense businesses were attracted to the Bermuda regime, the use of private and structured assets increased. Additionally, the increase in interest rates has made the businesses subject to higher liquidity risk.

The BMA has approached the enhancements in a holistic way, with increased focus on risk management, governance, more rigor and prudence required for SBA modeling, and refinements to the long-term risk.

Liquidity risk management, model risk management, attestation requirements, and documentation requirements became explicit and extensive through the consultation papers and Insurance Amendment Rules 2024. The requirements increase insurers’ accountability in modeling the complexity of the business throughout the actuarial process, i.e., data, model, methodology, assumptions, validations, and documentation.

SBA requires certain prudence since the model will never reflect the complex reality in full. For example, insurers may make tactical decisions, there may not be data available to analyze to the full granularity. As such, BMA asks for prudence to allow for certain complexities not captured in models. There are constraints and prudence in modeling reinvestment, disinvestments, default and downgrade costs, transaction costs, and any other simplifications. Insurers are required to perform the SBA eligibility test to ensure liquidity and lapse risks do not jeopardize the business.

The long-term risks now include explicit lapse risk, which is a core concern that drove the enhancement to the framework.

Implications and final thoughts

The enhanced requirements may be demanding but they are driving insurers to be more accountable for the actuarial and risk management to manage the business. In some cases, the requirements ask questions that may not have been considered or documented in the past. The enhancements are promoting financial reporting actuaries to be more interactive with investment management, investment policy, and asset-liability management. Insurers are incentivized to have good governance and optimize the investment strategy to reduce the SBA. This is a lot of work. Yet, if anyone enjoys solving complex problems, like many of the actuaries I have met, the Bermuda regime will be a fascinating one.