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The Bermuda Monetary Authority (“BMA”) has announced plans to introduce a 3-tiered capital system designed to assess the quality of capital resources of certain classes of Bermuda general business insurers. The new regime will be extended to Class 4 and Class 3B insurers in the fourth quarter of 2010 with a transitional period of a year. The system will eventually be extended to Class 3A insurers in accordance with the “proportionality principle”.
Under the new system, capital eligible to support an insurer’s capital requirements will be the aggregate of its “Basic Capital” and its “Ancillary Capital”. Basic Capital will be made up of a company’s capital stock, contributed surplus and statutory surplus. Preference shares may be included as capital stock, but its availability as Tier Capital will depend on the degree to which it satisfies applicable Tier Classification Criteria, as will be set forth in the relevant regulations.
Ancillary Capital will consist of any other off-balance sheet financial instruments which are approved by the BMA for statutory capital purposes (letters of credit, loan notes etc). Depending on the instrument, the BMA may impose restrictions on the amount and/or duration that such assets may qualify as Ancillary Capital. All capital instruments will be classified into a tier, based on their “loss absorbency” and other characteristics, pursuant to the Tier Classification Criteria.
Tier 1 Capital will be comprised of the highest quality capital, meaning that it is able to absorb or respond to losses under all circumstances. Tier 2 Capital will generally provide full protection to policyholders in an insolvency, but will have moderate loss absorbency on a going-concern basis. Tier 3 Capital will meet, on a limited basis, some of the characteristics exhibited in Tiers 1 and 2, but will otherwise be regarded as the lowest quality capital available to meet regulatory capital requirements.
Under the proposed regime, only the highest quality capital will be permitted to be used to support the Minimum Solvency Margin (MSM) which must be maintained by all Bermuda insurers. Given that a breach of the MSM constitutes regulatory insolvency, it is proposed that a minimum of 80% of Tier 1 Capital and a maximum of 20% of Tier 2 Capital will be eligible to meet the MSM. It is anticipated that these percentages will be adjusted as respects the calculation of the enhanced capital requirements and target capital levels applicable to Class 4 insurers.
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New Capital Requirements for Bermuda Commercial Insurers