Leveraging European and US regulations from Bermuda

Vincent Huck: An interesting characteristic of Bermuda is that it sits between the US and Europe. How do you leverage from one jurisdiction to the other?

Thomas Olunloyo: The markets and regulations are very different, so I do not think there are many Bermuda insurers or reinsurers who are focused equally on the US and Europe. The skills and business model required to succeed can be very different in those territories so we see most reinsurers focusing on one or the other but rarely both at the same time.

Kevin Hovi: You effectively have to manage both to some extent. If you are a Bermuda company reinsuring from a US company, your guidelines are going to be US-based. So while you may be able to arbitrage between the two, your guidelines are not going to give you much room to do it. So you end up effectively managing to the stricter of the two.

Steve Hales: We are looking at both. Bermuda is our global platform and we are looking for opportunities globally. Potentially there are some synergies, but it gets very complex. For specific liability profiles, you might find there are some nice matches, but you would need to get down to the transaction level to see if the collateral can work.

But if you get it wrong, it can move away from you, and you end up getting some pretty complex modelling to understand it. We think we can do it, but we are being cautious.

Jelena Strelets: We have also seen a few examples of companies starting to think about, 'Do we want to look at Europe or somewhere else perhaps? Does it make sense just to focus on the US?

Vincent Huck: You mean in Asia?

Jelena Strelets: Australia, Canada, Asia as well.

Thomas Olunloyo: It comes down to organisational capability and the skill sets you have within the business. We started writing business in Canada earlier this year, and we find the requirements to do business in Canada are significantly different to those in Europe. For example, the collateral rules are very different, and we need to ensure we have the appropriate skillsets and experience to focus on each market to manage the business well.

The first decision is what are your objectives: when looking at new territories a key part of the assessment has to be your organisation's capability, skill sets and ability to service all those different regulatory requirements.

Vincent Huck: When you say, 'significantly different', is that more constraints in one over the other?

Thomas Olunloyo: The constraint are different. From a regulatory perspective, Solvency II is different to LICAT in Canada and understanding the differences shapes what we do from a business perspective. The collateral requirements for European business v Canadian business can be very different for example.

We also have to think about how the origination of assets differs. The level of experience in new markets matters as quite often the risks are idiosyncratic, especially in the case of alternative assets. There are additionally a number of practical factors to consider such as local supply, hedging requirements and capital treatment as this can differ across territories.

Josh Braverman: It is very well said. Whenever you look at a different jurisdiction, your core investment strategy may or may not be efficient from a cedent's perspective for collateral, and it may even not work at all. Then you have to consider adjusting your investment strategy and starting to think about other options.

You might have the capital and tax strategy optimized with your core investment strategy, and then you go to another jurisdiction and it does not work. You have to think about it differently.

Vincent Huck: For those of you who focus on Europe, looking at the next Solvency II review, and considering that Bermuda wants to keep equivalence, how will the review impact you? What sort of change do you maybe want to see out of the review?

Sylvia Oliveira: We watch it very carefully, because we certainly think that Bermuda will follow suit. One area in particular is the interest rate risk. I do not know if there are plans to change the standard shocks.

Vincent Huck: There is definitely a desire on the part of Eiopa to have the possibility of negative interest rates recognised in the standard formula's interest rate shock.

Steve Hales: Negative interest rates stress tests potentially could create problems for many German life insurers.

There is probably a lot of work to be done in Europe before it starts to feed back into the BMA's work.

If the UFR is reduced, or the last liquid point extended, then it could be an interesting opportunity, as it may bring out some more transactions or maybe some differently structured transactions compared to what we have seen in the past.

Thomas Olunloyo: A question for those of us who are writing European business: when you price your credit portfolios, do you use a curve that incorporates the ultimate forward rate?

Iain Forrester: My personal view is that it's more important to focus on the last liquid point than the level of the ultimate forward rate. That is, at what maturity do you stop using market data and how do you then extrapolate to the ultimate forward rate?

The recent consultation paper from Eiopa highlighted that, as at year end 2018, changing the last liquid point of the Euro curve from 20 years to 50 years would have reduced the SCR took the SCR ratio of insurers in the Netherlands below 100%, from over 200%, and would have reduced the ratio for Germans insurers by almost 200%.

This assessment does not consider the impact of Eiopa's proposal to change the calibration of the interest rate SCR, which I'd expect reduce those capital ratios even further.

Steve Hales: In Europe, it has taken a while for general acceptance that rates are not going up. Although regulators obviously do not want to send the industry over the edge, they do have to start addressing this 'low for long' scenario and start getting companies to do something about it.

The way companies have been adjusting is probably not as the regulators were hoping. Certainly in markets like the Netherlands they were expecting more innovation and more structural changes in the industry. And it has not been happening at the pace that they would like.

It is a real challenge for companies, because obviously they need fresh capital to face those changes. That is why there is a strong role to for us to play in addressing this more and more around reinsurance, because it basically allows those companies to release some of that capital and make the changes that are needed, without relinquishing their relationships with customers and distributors.

Josh Braverman: In the US, to a large extent, a lot of the defined benefit pension schemes have gone away and the guaranteed cashflows for retirees in products sold by the insurance industry in longer tenors are not as large as they are in Europe.

Kevin Hovi: But the pension risk transfer market is pretty long.

Josh Braverman: Yes, that is a fair point.

Vincent Huck: Are you following what is going on with the Brexit saga, and are you therefore shifting your exposure towards the continent instead of the UK?

Sylvia Oliveira: I would love to hear from the UK guys. What is going on? How are people reacting?

Alex Wharton: Pricing volatility due to interest rate volatility is where apprehension is. And that can either delay deals or mean they are pushed through more quickly, depending on which way you look at it, but it is certainly a big consideration, as with any political risk.

Steve Hales: There is not much we can do about it, but we definitely need to be aware of what is happening. There is a cultural link between the UK and Bermuda, and if the UK did crash out and there was a negative impact on the relationship with the EU, I am sure the BMA will be aware of it and will be lobbying to make sure they stay close to European regulators.

But all we can do is just keep doing business in a transparent and focused way, demonstrating the value that we add, and staying close to European regulators and companies. But it also could drag on for several years.

Thomas Olunloyo: From a regulatory perspective, I do not anticipate a lot of dislocation coming from Brexit for Bermuda insurers or reinsurers due to Solvency II equivalence which provides continued access to the European market.

Part one of this roundtable is available here and part two is available here.