Insights: Bermuda

For its summer international focus, The Actuary takes a look at Bermuda, one of the largest global reinsurance domiciles and, as reports show, home to more than 40 life and annuity entities. From multinationals to boutique life reinsurance firms, Bermuda has a mix of experience levels, all of which are adapting to regulatory enhancements. In this article, we examine regulatory updates that became effective year-end 2024, and proposed enhancements expected to become effective by the end of 2025.

The Bermuda reinsurance market is regulated by the Bermuda Monetary Authority (BMA). The Bermuda regulatory regime, as promulgated by the BMA, is Solvency II equivalent (produces the same outcome-based solvency results as the Solvency II regime); Bermuda is also a National Association of Insurance Commissioners (NAIC) reciprocal jurisdiction. Bermuda has experienced steady growth in recent years, with a consistent uptick to 3.5 percent of shares of global life reserves as of 2023 (see Figure 1).

Figure 1: Bermuda and the global life insurance market

Source: March 2025 BMA report, Insights and Reflections on Asset Intensive Reinsurance in Bermuda

Bermuda balance sheet

In Bermuda, the solvency accounting basis is the Bermuda Economic Balance Sheet (EBS), which is calculated on a market value basis. Figure 2 illustrates the Bermuda EBS; on the left are the assets, and on the right are the EBS liabilities and total adjusted capital (TAC).

Figure 2: Bermuda EBS

Source: WTW Insurance Consulting Technology Life Practice

The Technical Provisions generally indicate that the Bermuda EBS liabilities are the sum of Best Estimate Liability (BEL) and Risk Margin. BEL can be calculated using the Standard Approach or the Scenario-Based Approach (SBA). The Standard Approach calls for discounting liability cashflows at quarterly published prescribed spot rates intended to represent a conservative asset portfolio return. The SBA relies on asset-liability management (ALM) modeling to determine the amount of assets needed to fully defease (set aside sufficient funds for) the liabilities under eight interest rate scenarios. The most conservative (highest reserve) scenario is the SBA BEL. There are a number of limitations on assets that back the SBA reserve. In addition to ALM risk, the SBA BEL now includes a component called the Lapse Cost to address lapse risk. ¹

Lapse Cost applies to new business written in and after 2024, including any new flow business written under an existing reinsurance contract. ²

While best-estimate liability assumptions are permitted to calculate the Technical Provisions, there are embedded margins over true best estimate reserves (gross premium valuation). The BEL adds margin for future interest rate uncertainty and policyholder optionality, while the risk margin adds margin for liability cash flow uncertainty.

Bermuda required capital is calculated according to the Bermuda Solvency Capital Requirement (BSCR). BSCR includes both shock-based and factor-based risk charges. Like other required capital regimes, BSCR segments risks into different categories. The main categories are Market Risk, Insurance Risk, Credit Risk and Operational Risk.

Year-end 2024 Bermuda regulatory updates

There are three notable regulatory updates we will discuss:

1. Updates to the BSCR Insurance Risk calculation
2. Additional requirements for asset modeling in SBA reserving.
3. Additional governance requirements.

BSCR insurance risk updates

The BMA has updated its BSCR Insurance Risk requirements to include two new components: Lapse Risk and Expense Risk. Lapse Risk accounts for the risk of adverse (to the insurer) future policyholder decisions. Expense Risk accounts for the risk of higher-than-expected future unit expenses. These will be phased into BSCR, linearly, over a period of 10 years starting in 2024.³ In addition, the Risk Margin, which is calculated using a discounted cost of capital approach, will also be affected by these changes.

Given its complexity, we will now focus on Lapse Risk. Lapse Risk accounts for adverse policyholder behavior and is calculated as the maximum of three prescribed policyholder stresses. Under each lapse stress (Mass Lapse, Lapse Up and Lapse Down), the BEL is recalculated, and the stress that produces the highest increase in BEL is the Lapse Risk capital charge.

Policyholder optionality is not just limited to “lapses” but includes “all applicable legal or contractual rights of policyholders (policyholder options) that may alter the value of the future cash flows of the (re)insurance contracts entered into by the insurer.”⁴ Some examples of policyholder options within the scope of Lapse Risk are voluntary surrenders, buy-downs and partial withdrawals. To put this risk in perspective, it may be useful to note some historical examples of adverse policyholder behavior. One example being universal life with secondary guarantee policyholders choosing to minimum fund their policies once the secondary guarantee is in the money. A second example is lower-than-expected ultimate lapse rates for Long-Term Care.

Lapse Risk Stresses (detailed in the 2024 Prudential Standards) that were effective December 31, 2024:

• Mass Lapse. Apply a mass lapse shock over the first projection year. The mass lapse stresses are based on product and geographic region.
• Lapse Up. Apply permanent relative increase in policyholder option exercise rates for all homogeneous risk groups that are adversely affected by such risks (this should apply only for those homogeneous risk groups). Stresses vary by geographic region (e.g., the U.S. has a 40% relative increase).
• Lapse Down. Apply permanent relative decrease in policyholder option exercise rates for all homogeneous risk groups that are adversely affected by such risks. Stresses vary by geographic region.

SBA asset requirements

The BMA has enhanced its SBA asset modeling requirements, which are in effect as of December 31, 2024. These requirements ensure that minimum standards are adhered to when calculating SBA BEL and that carriers use prudent SBA assumptions.

SBA asset-related requirements:

• Asset Sales. Models must project asset market values and, in years of cashflow shortfall, model the asset sales (i.e., cannot model borrowing).
• Derivatives must be explicitly modeled and approved by the BMA.
• Defaults and downgrades. Prescribed floors by the BMA and are intended to be reflected as reductions to projected asset cashflows.
• Transaction costs. Required to model the cost of buying and selling assets in the projection period.
• Prior approval of investment-grade assets backing BEL. Insurers must obtain prior approval to use the following assets to back BEL: private assets, structured securities, residential mortgage loans, commercial mortgage loans and investment-grade preferred stock.
• Fungibility. Insurers cannot aggregate different blocks of assets and liabilities for purposes of reserve calculations unless full fungibility exists within these blocks

Governance requirements

The BMA implemented governance requirements to strengthen the island’s risk management practices, including the following three that went into effect December 31, 2024:

1. Data Policy. A data policy designed to ensure that data supporting Bermuda valuations are well documented and validated.
2. Enterprise Risk Management Framework. Implements board responsibilities and control functions for overseeing asset and liability models.
3. Model Documentation. Clarified and expanded the description of model documentation requirements.

Future regulatory enhancements

The BMA has proposed notable regulatory updates that are expected to be effective in 2025. The three topics we will discuss in this section are:

1. The Prudent Person Principle
2. Increased Public Disclosure Requirements
3. The prescribed Great Financial Crisis Stress

Prudent Person Principle

The BMA has recently provided asset regulatory guidance in its Prudent Person Principle 2024 consultation paper.⁵ From a historical perspective, mismanaged investments and excessive asset risk taking have been a factor for notable insurer insolvencies. It is crucial for any regulatory regime to ensure that insurers invest responsibly to prevent jeopardizing obligations to policyholders.

Below is some additional notable guidance included in the Prudent Person Principle consultation paper which became effective in July of 2025:

• Investment strategy should seek capital preservation and return on investment objectives.
• Insurers should invest only in assets whose risks can be identified, measured, monitored, managed, controlled and reported on.
• Insurers must be granted prior approval to use affiliated assets.
• Derivatives must be used for risk management purposes, not speculative purposes.
• Insurers must assess risks associated with complex assets (especially nonpublic complex assets). Insurers should conduct liquidity stress testing of these complex assets and set investment limits based on these tests.

Public disclosure requirements

The BMA has proposed strengthened public disclosure requirements for long-term insurers as described in a December 2024 consultation paper.⁶ These disclosures will increase transparency, allowing stakeholders to better evaluate Bermuda reinsurers. Here is a summary of the three key proposed public disclosures that are expected to be effective in 2025:

1. Asset holdings. Insurers must publicly disclose their asset holdings at a granular level similar to the level in U.S. Statutory annual statements.
2. Liabilities. Insurers must publicly disclose product-level gross and net reserves and the associated liability durations.
3. ALM. Insurers must publicly disclose the ALM strategy, perform liquidity stress testing, explain significant changes in asset allocations and provide an overview of risk management practices.

GFC stress test

The BMA has introduced the Global Financial Crisis (GFC) stress which companies needed to file in the second quarter of 2025. This stress is intended to gather market-wide information to assess the potential that Bermuda poses a systemic risk to the global financial system.⁷ Each reinsurer must calculate the impact to their financial strength from a prescribed GFC-mimicking stress. Companies must also consider the recapture triggers and contractually enforceable management actions that may mitigate recapture risk.

Conclusion

The BMA has made notable and significant regulatory changes that became effective for year-end 2024. Notably, BMA regulations now increasingly account for adverse policyholder optionality and apply prudence to the assets used to back policyholder obligations. The proposed regulatory enhancements for 2025 will increase transparency and further protect policyholder obligations.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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