The Bermuda Monetary Authority (“BMA”) announced on June 1 that it had taken an important step towards achieving equivalence with the European Union’s imminent Solvency II regulations by initiating a pilot of its internal capital model (“ICM”) review process with Bermuda’s largest commercial insurers. Under the ICM framework, insurers and reinsurers, with the approval of the BMA, will be able to use their own ICM to determine the amount of regulatory capital required for such companies.

The proposal is part of the broader initiative of the BMA to prepare Bermuda’s insurance  and reinsurance regulations for third-country equivalence assessments under Europe’s Solvency II Directive.  It is important, particularly for Bermuda-based insurers and reinsurers conducting business in Europe, that regulatory equivalence is achieved in order to avoid becoming competitively disadvantaged.

Director of Policy, Research and Risk Assessment at the BMA, Craig Swan said, “The pilot enables the Authority to test its review process, allowing for refinements to be made to the framework as required, and will assist in our resource planning to support the process moving forward…The ICM assessment includes evaluating the adequacy of the design, statistical quality and calibration of the models submitted, and, importantly, the governance structure, controls and documentation surrounding them.”

BMA chief executive officer Jeremy Cox noted, “Once the framework is implemented the Authority will provide approval for a model for regulatory purposes only if it is assured that all relevant minimum standards are met, and that an insurer has established an effective and suitable track record of reliable risk management.”

In July 2009 the BMA issued guidance notes outlining the components of the ICM framework thereby formally establishing a standards and applications process for allowing the use of insurers’ and reinsurers’ ICM. These components include detailed pre-application conditions that must be met prior to submitting their models for review; the application review procedures the BMA will follow; and the monitoring and control activities the BMA will undertake once a model has been approved.