Assessment of the Supervision and Regulation of the Financial Sector

This paper presents an assessment of Financial Sector Supervision and Regulation for Bermuda. The Bermudian authorities have made impressive progress in developing and implementing a risk-focused approach to supervision across the range of their sectoral supervisory responsibilities. Full rollout of the risk-based regulatory system to all market segments is, however, required for achievement of comprehensive oversight of the market. To support the introduction of a formal risk-based supervisory system, the banking department has been restructured.


This paper presents an assessment of Financial Sector Supervision and Regulation for Bermuda. The Bermudian authorities have made impressive progress in developing and implementing a risk-focused approach to supervision across the range of their sectoral supervisory responsibilities. Full rollout of the risk-based regulatory system to all market segments is, however, required for achievement of comprehensive oversight of the market. To support the introduction of a formal risk-based supervisory system, the banking department has been restructured.

I. Introduction

1. An update of the 2003 offshore financial center (OFC) Module 2 assessment of financial regulation and supervision in Bermuda was carried out in the periods May 7–23 and June 12–22, 2007within the framework of the OFC Assessment Program approved by the Executive Board of the Fund in November, 2003. Consultations with the authorities continued between September 2007 and May 2008.

2. This report briefly describes the developments in the financial system and regulatory and supervisory arrangements in Bermuda since 2003; provides an update on how the relevant recommendations from the 2003 assessment have been implemented; and summarizes the results of the detailed assessments. Detailed assessments were carried out of the supervision of commercial insurers—on the basis of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles, and of the AML/CFT regime—on the basis of the AML/CFT methodology of 2004, as updated in June 2006, for assessing compliance with the Financial Action’s Task Force 40+9 Recommendations. ROSCs based on the detailed assessments of insurance supervision and the AML/CFT regime are annexed. The 2003 assessment of banking supervision was factually updated, taking account of the revised Basel Core Principles (BCP).

3. The 2003 assessment had found that supervision was well–developed in banking, key areas of securities regulation, and for AML/CFT (based on the then–current standard), but noted some deficiencies in insurance supervision.

4. Bermuda is both the third largest reinsurance center after London and New York, and the second largest captive insurance domicile after the U.S.1 The assessment update gave most attention to the insurance sector, focusing in particular on the systemically important features of the Bermuda market. Commercial insurers are globally active and supervisory standards to cover them have been agreed by supervisors internationally. The detailed IAIS assessment covered the commercial sector, with stress testing of a sample of such companies to complement the assessment. However, exposure to captives is dominated by related parties, and there is as yet no agreement on the extent of oversight required in the captive insurance sector.2 To reflect this situation, a review of captive supervision was carried out. The extensive changes in the AML/CFT standard since 2003 dictated a detailed assessment of that regime.

II. Political And Economic Background

5.Bermuda is a self–governing British Overseas Territory. The governor, appointed by and representing the British monarch, has responsibility for external affairs, defense, internal security, and the police. The legislature has two chambers—the upper house of 11 appointed members and a 36–member house of assembly elected for a 5–year term. The last elections were held in 2003. Bermuda’s legal system is based on English common law, the doctrines of equity, and Bermuda statute law dating from 1612. The judicial branch is headed by the Chief Justice and the courts comprise magistrates’ courts, the supreme court, and a court of appeal. In 2006, a commercial court was established as part of the supreme court and supreme court rules were updated.

6.Bermuda is one of the wealthiest jurisdictions in the world with per capita GDP of over US$ 75,000 in nominal terms in 2005, largely as a result of its international financial center.3 The center contributed over half of real GDP, and almost 30 percent of employment in 2006. In 2008, the population is projected to be 64,200. Bermuda issues its own currency at par with the U.S. dollar and has a consumption–based taxation system with a payroll tax of up to 12.5 percent (on employment income), inheritance tax, and various stamp duties, but no taxes on unearned income or capital gains.

7.Economic growth also reflects Bermuda’s status as a global reinsurance and direct insurance center. In 2006, real growth accelerated to 5.4 percent from an average of 3.9 percent in the previous three years, with growth of 19, 4, and 19 percent respectively in the financial intermediation, business activities, and international business activities industries. This growth reflected the inflow of catastrophe reinsurance capital following the 2005 hurricane season. Output from hotels and restaurants grew by 10 percent.4 Inflation as measured by the consumer price index was 3.8 percent in 2007.

III. Financial System Overview

8.Bermuda is a major international financial center, mainly due to its importance as an operating base for the international insurance and reinsurance industry, and to a lesser extent for collective investment schemes. The banking sector is small and focuses on serving the international business sector. There is one stock exchange that lists domestic companies and mutual funds as well as cross–lists international companies. Trading volume in the exchange is very thin.

A. Banking

9.There are four licensed banks in Bermuda, two of which are locally–controlled—Bank of N.T. Butterfield and Son, Ltd., and Capital G. Bank Ltd.; the third, Bank of Bermuda, was purchased by HSBC—the U.K.–based banking group—in 2004, and the fourth, Bermuda Commercial Bank is controlled by a Cura$000E7;ao bank. Consolidated total assets of banks and the single deposit company5 amounted on average to $22 billion during 2003–2006, or four times the country’s GDP.6

10.Most banks have focused their operations on serving the growing international business sectorby offering investment, trustee, and financial management services, since the growth potential for retail banking is limited by the small size of the population. An indirect indication of the reliance of banks on commercial operations targeted to the international business, particularly the insurance sector, and business overseas, is the share of their foreign assets in their combined consolidated balance sheet. At the end of 2007, the BMA reported that foreign assets accounted for 80 percent ($19.4 billion) of the total combined balance sheet of Bermuda banks and deposit companies (Table 2).

Table 2.

Bermuda Financial Sector

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Source: Bermuda Monetary Authority (BMA), and BMA, Annual Reports, 2003 to 2006.

Includes companies holding both general and composite business licenses. Since the insurance companies have different financial years, comparable aggregate data is not yet available for 2007.

11.Certain indicators suggest low risk in the banking sector. Capital adequacy in the consolidated banking sector appears adequate. The capital to risk–weighted assets ratio was 17.1 percent at end–2007 (16.8 percent at March 2008), well above the 10 percent minimum ratio required by the BMA, and up from around 15 percent at end–2005. Liquidity, as measured by the loan–deposit ratio, deteriorated to 35 percent at end–2007 from 24 percent at end–2004.7 The liquidity position of the banks, however, is still considered comfortable by rating agencies.

B. Securities Markets

Collective Investment Schemes

12.Bermuda has a large and active investment fund and investment funds services sector. The jurisdiction hosts a number of multinational financial services organizations, and is home to a large number of hedge funds, investment managers, and portfolio managers as well as internationally–active fund administrators.

13.The number of collective investment schemes (CIS) in Bermuda increased substantially during 2002–2006, favored in part by the absence of income or capital gains taxes for CIS, and reflecting the growth of the hedge fund industry.8 There were 1,303 schemes with a net asset value of $249 billion in 2007, up from 912 schemes with a net asset value of $68 billion in 2002. The schemes manage a total of 2,162 portfolios for 1,679 funds (mutual funds, umbrella funds, sub–funds, segregated accounts, and segregated account companies) and 483 trusts (unit trusts, umbrella trusts, and sub–trusts).

Stock Exchange

14.Bermuda has a stock exchange with a limited number of full–service brokerage firms. The Bermuda Stock Exchange (BSX) is a fully electronic offshore securities market that serves as a domestic market for local companies and domestic CIS, and as a venue for recording trades in internationally–listed companies. As of end–2007, there were 543 securities listed in the BSX, including 361 CIS and 37 international companies cross–listed on onshore exchanges. The total market capitalization of the BSX was $350 billion at end–2007, and $391.3 billion at March 2008, up from $150 billion in 2002.

15.The vast bulk of trading volume on the exchange takes place in international issues—the domestic market was less than one percent of market capitalization in 2007. The annual trading volume in domestic equity securities was relatively thin in 2006 at $121 million but up by two–thirds compared with 2005, and in 2007 it rose by one–third to $165 million. The number of trading members in the BSX declined to 11 in 2007 from 16 in 2002. All trading members must be Bermuda–domiciled companies. The BSX also operates a clearing and settlement system and a depository. All systems are fully automated.

C. Insurance

16.With more than 1,400 registered (re)insurers, Bermuda is a significant player in the global insurance market. The Bermudian market is diversified and sophisticated. In 2006, Bermuda accounted for 12 of the top 40 global reinsurers rated by Standard and Poor’s, and 15 of the top 35 reinsurers rated by AM Best in 2004. The total number of registered insurers was 1,480 at end–2007. About 92 percent or 1,312 of the 1,421 registered insurers in 2005 were actively conducting business. They included 1,135 general insurers, 100 composite insurers, 77 long–term insurers, and 19 insurers that write domestic business. Composite insurers write a combination of general and long–term business provided that their long–term insurance business is incidental and limited9.Box 1 provides a brief history of the development of the industry.

Development of the Bermuda Market, in Brief

Bermuda’s insurance market began in 1947 when the founder of the American Insurance Group (AIG) based the international business of his insurance company in Bermuda. In the 1960s, Bermuda was a pioneering domicile for captive insurance companies. Bermuda remains the second largest domicile, after the U.S., for captive companies.

In the mid 1980s, when there was a shortage of coverage and high prices for excess liability insurance (additional coverage when limits on underlying policy are exceeded), the reinsurance companies Ace Ltd and XL Capital Ltd (earlier Exel) were formed for the sole purpose of providing excess liability. These later offered directors’ and officers’ liability, as did one insurer established for this purpose, and eventually diversified their lines of business. In 1988 Centre Re was formed to provide the innovative structured reinsurance (“arrangements that transfer limited risk relative to aggregate premiums that could be charged under the contract”, IAIS). These companies, formed to serve the U.S. market, chose to incorporate in Bermuda because of the timeliness with which incorporation was possible and the absence of income tax. Proximity to the New York markets and association with the U.K. would also have enhanced Bermuda as a location.

Following the loss of capacity in the U.S. market after the 1992 Hurricane Andrew, eight property catastrophe reinsurers entered the market. In the late 1990s, Arrow Re (Goldman Sachs) and Lehman Re (Lehman Brothers) were formed to facilitate reinsurance access to capital markets. These were followed by financial guarantee companies that provide guarantees for debt securities.

In addition to the initial important sources of attraction described above, the concentration of professional insurance skills in Bermuda now appear to be of dominant importance in attracting both firms and their customers. The concentration of insurance skills creates economies of scale for risk managers and others seeking corporate insurance. Major new influxes of capital followed September 11, 2001—whose insured losses resulted in lower capacity—and the 2005 hurricanes Katrina, Rita, and Wilma. The latter wave also included the innovation of sidecars. Sidecar structures allow a reinsurer to manage the underwriting risk of a book of business in an entity that is financed through the issuance of debt and equity to the market. Sidecars permit additional capital without the need to establish a new company. Several were closed in 2007 as the need for additional capacity has declined.


17.Bermuda legislation categorizes general insurers in four classes(see Table 3):

  • Class 1: single–parent captives insuring only the risks of its owners or affiliates of the owners, or pure captives;

  • Class 2: multi–owner pure captives and captive insurers deriving up to 20 percent of their net premiums from unrelated parties10;

  • Class 3: insurers not included in Classes 1, 2, or 4, including “captives” with more than 20 percent of their net premiums from unrelated parties; and

  • Class 4: insurers with minimum capital and surplus of $100 million underwriting direct excess liability and/or property catastrophe reinsurance risk.

18.Measured in terms of gross written premium (GWP), the Bermudian insurance market has more than doubled from 2001 to 2006, and it continues to attract a diverse range of start–ups and innovative insurance arrangements. The attractiveness of Bermuda for the insurance sector is evidenced by the record number of 82 new insurers that were established in Bermuda in 2006, a three–year high. In particular, the bulk of new capital attracted into the global reinsurance industry by the higher premiums resulting from the 2005 hurricane season flowed into Bermuda (see Box 1).

19.Ownership in the Bermuda insurance sector is geographically diverse but dominated by U.S. companies, which owned 60 percent of the 589 active commercial insurers at end–2005. Bermudian–owned and European–owned insurers represented 18 percent and 14 percent of the market, respectively. Around one in three commercial insurers were publicly–listed companies, of which two–thirds were listed in U.S. exchanges. The insurance sector accounted for 7.6 percent of the total employment of 38,947 in Bermuda. Insurance density (premiums per head) in the domestic market was $6,072.

20.Table 4 indicates the high degree of concentration in the insurance industry. GWPs in 2006 totaled $115.8 billion, of which almost 90 percent was written by commercial insurers.11 The top ten of the commercial insurers in each of the Classes 3, 4, and long–term together, had a share of two–thirds of total market GWP, and the top 10 of the Class 4 and long–term companies had 70 percent and 98 percent of GWP in their classes, respectively.

Table 3.

Bermuda: Insurance Sector

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Source: Bermuda Monetary Authority (BMA), and BMA, Annual Reports, 2003 to 2006.

Includes companies holding both general and composite business licenses.

Table 4:

Analysis of Gross Written Premiums in 2006

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Source: Bermuda Monetary Authority

21.GWP is diversified by the insurance line of business, and risk retention is generally high. Based on a survey covering two–thirds of the industry, in 2005 long–term insurers wrote 34 percent of GWP, “mixed” insurers1226 percent, and reinsurers 16 percent. Retention rates13 are high, almost 95 percent for long–term insurers and nearly 90 percent for mixed insurers. Direct insurers and reinsurers retained about 88 and 80 percent of their GWP respectively. While GWP (and hence exposure) sourced from North America declined from 62 percent in 200¾ to 57 percent in 2005, GWP from Europe rose from 6.7 percent (2003) to 19.4 percent. Global business represented 20.4 percent of industry GWP in 2005. 14

22.Overall, the Bermuda insurance market strengthened its capital base in 2006.15 While profitability of Bermudian reinsurers was hit by their combined 30 percent share of the insured losses from hurricanes Katrina, Rita, and Wilma (KRW), there has been a net–capital inflow. Hedge funds have been among the recent investors in the reinsurance industry, taking advantage of an innovative short–term risk transfer mechanism (sidecar) to help fill the depleted capacity caused by the hurricane losses in 2005 (see Box 1). The dominant players are the Class 4 insurers which accounted for 36 percent of the total capital and surplus at end 2006. They supply 40 percent of the property catastrophe reinsurance capacity to the U.S. market. Collectively, they settled $17 billion of claims arising from the 2005 hurricane season.

23.The investment profile of the industry is relatively liquid. Fifty two percent of the total assets as at end–2005 were in quoted bonds and equities, and 9.3 percent in cash and deposits. Investment and advances to affiliates represented 53 percent and 14 percent of the assets of direct insurers and composite insurers, respectively.16 In contrast, reinsurers and long–term insurers held 5 percent and 2.6 percent respectively, in intra–group balances. In 2006, quoted investments of commercial insurers were 50 percent of assets, investment in affiliates 23 percent, and cash and time deposits 8 percent.17

24.Going forward, the main strategic concern of commercial insurers is the tradeoff between gaining/retaining market share by lowering rates, and reduced profitability. As property/casualty insurance rates have fallen in the absence of major claims since 2005, competitive pressures have increased. Greater portfolio diversification has been driven by credit rating considerations18 and potential over–capacity, the latter due partly to added pressure from state–funded capacity for catastrophe risks in the U.S. Some sidecars that have provided additional capacity to reinsurers, such as those funded by highly leveraged investors, have disappeared. Standard and Poor’s noted that the depth and breadth of senior management of the class of 2006 start–ups are noticeably weaker than previous cohorts, as technical expertise may be spread thin by the high number of start–ups since 2001. Furthermore, their strong focus on property and other catastrophe–exposed lines of business could pose a challenge if volatility risk continues to increase as experienced during recent years.

D. Regulatory Framework, Oversight, and Market Integrity Arrangements

25.Bermuda’s single regulator, the BMA, supervises the insurance, banks, trust and investment businesses, collective investment schemes, the BSX, and the credit union. It also issues the Bermudian dollar.

26. The regulatory framework is based on the following legislation:

  • Bermuda Monetary Authority Act, 1969, last amended in 2006;

  • Banks and Deposit Companies Act, 1999;

  • Insurance Act, 1978, last amended 2006;

  • Investment Business Act, 2003;

  • Trusts (Regulation of Trust Business) Act, 2001; and

  • Investment Funds Act, 2006.

27.The BMA board is responsible for the policy and strategy of the BMA and the general administration of its affairs and business. The Board has 12 members, 3 of whom are executives appointed by the BMA subject to approval by the Minister of Finance (MOF). The minister appoints non–executive members. To enhance independence, board members are appointed for terms ranging from three to five years, and can only be removed from office for legislated reasons. The BMA’s non–executive chairman chairs the Non–Executive Directors’ (NED) Committee to provide an independent check on the performance of the executive members of the board. In 2006, the board instituted a number of reforms to its processes, restructuring the audit committee to an audit and risk management committee, and instituting a board code of conduct and conflict of interest policy, inter alia.

28. At the time of the assessment mission, the supervision ofinsurancewas carried out by the Insurance Department (ID) of the BMA, headed by the Supervisor of Insurance. All supervisory units now report to the Deputy CEO, a post created in 2007–08. Under recent legislative change, the BMA appoints executive members of the board, though these appointments do not have effect until approved by the minister. The staff of the ID stood at 50 persons at the time of the assessment, up from about 17 in 2003, and professional staff reached 45 by end–2007. An Insurance Advisory Committee (IAC), established under the Insurance Act 1978 (the IA) advises the minister on insurance matters. A number of professional bodies and self–regulatory industry associations complement the regulatory regime.

29.Banking supervision and securities regulationis the responsibility of the Banking, Trust and Investment Department (BTI) that is under a director who reports to the Deputy CEO of the BMA. The department was restructured in 2006. The Investment Funds Act of 2006 (IFA) came into effect in March 2007. The act seeks to align the regulation of CIS with the level of sophistication of their investors, and defines three types of funds: Standard, Institutional, and Administered Funds. Most of the CIS target sophisticated and/or institutional investors, and accordingly, regulations for these schemes focus mainly on the proper disclosure of information to investors. Private funds, open to a maximum of 20 investors, are excluded from the act.

30.The main pieces of legislation governing money laundering and the financing of terrorism are the Proceeds of Crime Act 1997 (POCA), and the Proceeds of Crime (Money Laundering) Regulations 1998, and The Anti–Terrorism (Financial and Other Measures) Act 2004 (The ATFA) respectively. Important amendments to the POCA, the Criminal Justice International Cooperation (Bermuda Act), and the Financial Intelligence Agency Act (FIA Act) were enacted in July 2007. The FIA Act (which was still to be put into effect in January 2008) establishes a new administrative agency (the FIA) that is being organized to take on the responsibilities of the current financial intelligence unit (FIU), part of the Bermuda police. The National Anti–Money Laundering Committee (NAMLC) brings together key ministries and departments and fills, in practice, the AML/CFT policy formulation function. NAMLC’s main legal mandate is, however, to advise the MOF and to issue industry guidance on AML issues.

E. Findings of Earlier Assessments

31.The 2003 assessment found that the regulatory and supervisory framework was well–developed in banking, key areas of securities regulation, and for AML/CFT (based on the then–standard and methodology). Some deficiencies were noted in insurance supervision—the ample powers of the BMA had not been fully realized. Annex III describes the actions taken in response to the 2003 assessments of banking and insurance supervision, and securities regulation.

32.As described below, the BMA has made extensive reforms to all areas of supervision, with the exception of the AML/CFT regimesince 2003, with particularly radical improvement in insurance supervision.

IV. Strengths And Vulnerabilities IN The Financial System

A. Progress in the implementation of financial standards and follow–up on 2007/08 market disturbances


33.The BMA has addressed most of the recommended actions in the 2003 report. In 2006, a major restructuring of the BTI was undertaken to support the introduction of a more formal risk–based supervisory framework and the required expertise was hired. Higher–risk institutions are identified through a standardized analysis and greater attention paid to these. An appropriate system has also been introduced to define a capital charge where there is material market risk.19 This is the first step toward putting in place the new Basel II capital adequacy framework that the BMA intends to implement in 2009. Credit evaluation and policy has also been strengthened through a policy paper that sets out the BMA’s enhanced responses in cases of large exposure, connected lending, and other risks. Policy papers also address operational and other risks. On–and off–site supervision have also been strengthened.

34.In addition to addressing the 2003 recommendations, the BMA has upgraded its policy framework to comply with the 2006 revised BCPs. The increased standard of supervision will require continuous attention to resources. In addition, the mission recommends:

  • reviewing the scope and frequency of on–site examinations;

  • enhanced country exposure reporting; and

  • more direct intervention tools in the event of impending bank failure.

35.The two Bermudian banks holding some sub–prime related assets in their investment portfolios have suffered mark–to–market declines in value, resulting in stepped–up scrutiny from the BMA. The assets are higher rated tranches of asset–backed credits, representing 10 to 15 percent of their investment portfolios, and are held–to–maturity investments. As a result, the banks and their auditors are of the view that there has not been permanent value impairment. The BMA is reviewing portfolio details on a monthly basis, and holding meetings with management to monitor portfolio management.


36.In insurance, the BMA has instituted a strongly risk–focused supervisory approach in line with the diversified range of insurers in Bermuda. Supervisory scope and intensity is determined by an assessment of the likely scale of impact of a risk, as well as of its likelihood.

37.There is a high level of observance of the IAIS core principles. The ID’s goal of becoming a leading international regulator has resulted in a well–designed process of staff, systems, and framework upgrading that is proceeding expeditiously. Taking account of the 2003 assessment recommendations, the IA has been amended several times and initial guidance was introduced. The 2006 Amendment Act revised the framework to introduce more detailed licensing criteria, and required the BMA to publish a Statement of Principles and introduce a code of conduct. It also introduced a detailed regime for oversight of insurance controllers. Annex I provides the Report on the Observance of Standards and Codes (ROSC) for the IAIS insurance core principles assessment of the supervision on commercial insurers.

38.Implementation of a risk–focused framework, that assigns risk factors to the companies, has been started. Insurers are ranked by risk likelihood and impact. A riskier categorization results in increased supervisory focus including on–site inspection. The framework will also include a risk–based solvency regime. The licensing function has also been revamped with strengthened criteria, and enhanced regulatory reporting will be introduced.

39.Oversight of Classes 1 and 2, predominantly captives, is supported through the insurance manager infrastructure.20 These managers are licensed and integrated into the supervisory process. Management services give the supervisor a means of monitoring and inspecting numerous small companies by providing a focal control point representative of the management of the captives.

40.Effective and comprehensive implementation of the risk–based regulatory system will depend on:

  • continuous review of regulatory resources;

  • preservation of regulatory independence;

  • high transparency and disclosure to enhance recognition and support supervision; and

  • risk rating Class 3 companies to allow for the granular tailoring of supervisory stance currently available for Class 4.

41.The sub–prime–related exposures are affecting or could affect Bermudian companies mainly through four principal channels: investment in structured products, financial guarantee portfolios, liquidity positions, and potential claims on professional and executive liability insurance. The conservative investments of many Bermuda–based insurers have limited their direct exposure.21 Nevertheless, asset valuation uncertainty is affecting insurers (for example, AIG was downgraded and life reinsurer Scottish Re bought out). Fitch notes that, while Bermudian insurers place a higher proportion of invested assets in MBS and ABS than do U.S. insurers, the credit quality of their MBS and ABS remained high despite recent pressure.22 It would appear that exposure has been greatest for shareholders in financial guarantors who insured structured products, with the financial guarantee industry under considerable stress; for example, XL has been downgraded in part because of its exposure to a bond insurer. Exposures to loss from executive and professional liability are not yet known but these are reported to be reserved.23

42.The BMA has taken a proactive approach to the sub–prime crisis. It conducted two surveys in August and November 2007 to assess investment and underwriting exposure to sub–prime risk, and evaluate insurers’ risk management programs. The studies analyzed the four main areas of potential exposure and conducted stress tests, concluding that there is no systemic stress to the Bermuda market. A few companies were identified for enhanced supervision and monitoring. This work has been shared with related home or host supervisors in other jurisdictions and discussed at IAIS meetings. A guidance note on reserving practices for financial guarantee insurers has been issued for consultation.


43.The BMA has improved its ability to oversee CIS. New legislation provides full powers of information–gathering and inspection, as well as fund and prospectus rules. A dedicated investment funds team with additional experienced staff has been established and Fund administrator licensing has begun.

44.Other upgrades in securities regulation cover market intermediation and clearing and settlement. The BMA staff’s technical skills have been upgraded through recruitment and training, and clearer rules and guidance for inspection of investment providers have been put in place. Through the Investment Business Act, 2003, the BMA now has the authority to license clearance and settlement systems (currently only provided by the BSX). In addition, the offences of market manipulation and insider dealing were introduced by 2004 legislation.

Anti–money Laundering and Combating the Financing of Terrorism

45.The AML/CFT regime has not been much changed since the AML legislation of 1998 and the 2003 IMF assessment. Apart from the 2004 ATFA Act and some changes to the POCA, revisions to the guidance notes resulting from recommendations of the 2003 assessment are still in draft. Therefore, Bermuda has not kept pace with the FATF Recommendations and has not been able to introduce the risk–sensitive approaches to financial institution oversight permitted under the FATF 40+9.24 The regulatory framework does not address CFT issues, and customer due–diligence requirements are narrowly focused on customer identification. Enhanced capacity and resources are required to strengthen AML/CFT supervision in key industries. The new laws, POCA, the Bermuda Act, and the FIA Act address a number of the weaknesses in the AML/CFT legal framework identified by the mission. Annex II provides the ROSC for the assessment of the implementation of the FATF Recommendations for AML/CFT.

B. Stress Test Results for Class 4 and Long–Term Issuers

46.Ten of the 41 Class 4 and long–term insurers used their internal models to calculate the impact of various shocks, but these did not affect their ability to meet regulatory requirements. Results were reported in terms of the reporting requirements of the BMA, viz. change in capital and surplus, minimum regulatory premium ratio, and minimum regulatory loss reserves ratio. All of the companies employed a combination of proprietary and in–house models to analyze their risk exposures. The scenarios included three natural catastrophe events, two pandemic events, and worst–case scenarios that each firm in the sample was asked to specify for itself. The catastrophic events were found to have a high negative effect on companies’ capital, with the most severe impact resulting from the worst–case scenarios, only two of which included economic (in addition to natural catastrophe) events. No companies in the sample fell below the regulatory requirements, demonstrating the strong balance sheets of the companies.

47.Due to time constraints faced by the BMA and tested companies, the stress tests only covered a subset of the risk factors considered necessary to obtain an overall risk profile. However, more comprehensive assessment of risks would be obtained by use of a wider variety of stress tests (including financial market effects, and stresses on assets for example), and employment of economic valuation rather than accounting data. The single company that combined economic recession and catastrophic events in its worst–case scenario had a worse outturn than the others, suggesting that future stress testing could usefully focus on examining the effects of combining extreme events to obtain more insight into possible vulnerabilities. The BMA should also devote resources to understanding the companies’ models to learn the strengths and weaknesses of their risk analyses.

C. Cross–border Cooperation and Information Exchange

48.The BMA does not require a formal agreement or memorandum of understanding (MOU) to provide assistance to other supervisors. However, it has been willing to enter into bilateral MOUs where other authorities prefer to document mutual commitments by this means. The BMA has the ability to share confidential information with foreign supervisory authorities under “gateway” provisions in its regulatory laws. It also has specific powers to compel the production of information from licensed persons where the information is not required for its supervisory purposes, but only in order to assist a third country supervisor.

49.In relation to compulsory power, the BMAA, 1969, (Sections 30A to 30C) provides powers for assisting foreign regulatory authorities. The BMA is, however, required to take account of certain matters prior to providing the requested information. These include the likelihood of reciprocity, whether the requesting foreign regulatory authority has legislation and requirements similar to those of Bermuda law protecting the confidentiality of information provided to it, public interest, the nature and seriousness of the issue, and whether the requesting authorities will meet costs if required to do so.

50.There are also sectoral provisions for cooperation and information exchange. Section 52B (2) of the IA provides for assistance to be given to requesting authorities exercising similar regulatory functions without requiring strict reciprocity. In addition, there are two MOUs specifically covering insurance, and the BMA has applied to be a signatory of the IAIS’s multilateral MOU. The 2003 IOSCO assessment had found that the BMA had fully implemented the IOSCO standard on cooperation. In addition, in 2007 the BMA signed IOSCO’s Multilateral MOU. The guidance on consolidated supervision in the banking sector has been revised in line with the 2006 BCP.

51.As a regulator in an important home jurisdiction for insurance, while existing provisions are adequate, enhanced cooperation would be valuable. The mission recommends that the BMA implement routine arrangements to alert host supervisors of material developments, formalize exchanges with state insurance supervisors in the U.S. and the U.K. FSA, and consider joint inspections.

52.Bermuda has a comprehensive legal and institutional framework for international cooperation that is largely consistent with international standards for AML/CFT purposes, but there is a need to strengthen cooperation mechanisms among governmental institutions for AML/CFT.