June 2008

BERMUDA CAPTIVE CONFERENCE

Bermuda Captive ConferenceThe Fairmont SouthamptonJune 17th 2008

CURRENT ISSUES & REGULATORY UPDATE

• OPENING REMARKS

• Moderator: Peter Willitts, President, BIMA

• Topics to be Covered

Panellists:

• Shelby Weldon – Director Insurance, Bermuda Monetary Authority

• Jason Carne – Partner, KPMG Bermuda

• David J. Doyle – Partner, Conyers Dill & Pearman

BERMUDA CAPTIVE CONFERENCE

Bermuda Monetary Authority

2008/09 Business Plan

SHELBY WELDON

CURRENT CHALLENGES:

• Leading International financial Center

• Evolution of International Regulatory Standards

• Turbulent Capital Markets & Softening Insurance Market

2008 BUSINESS PLAN HIGHLIGHTS:

• Class 3 Re-categorization

• Solvency Regulations

• On-Site Program

CLASS 3 RE-CATEGORIZATION

Shelby Weldon & David Doyle

RATIONALE FOR PROPOSAL:

• Risked Based Approach to Supervision

• Limited regulatory resources

• Captive vs. Commercial

• Appropriate fee structure

TIMELINE:

• Consultation Paper presented to Market – May 2008

• Consultative period – May 2008 to June 2008

• Legislation passed by House of Assembly – July 2008

• Re-registration process – 3rd & 4th Quarters 2008

• All companies reregistered – 1st Quarter 2009

• NEW CATEGORIES• NEW 3’S

• 3 A’S

• 3 B’S

• SPECIAL PURPOSE INSURERS

• The New Class 3

• Captives writing > 20% but < 50% unrelated net premium

CLASS 3A

• Companies whose percentage of unrelated business represents 50% or more of net premiums written and/or booked reserves

• Companies net written premiums does not exceed $50 million

CLASS 3B

• Companies whose percentage of unrelated business represents 50% or more of net premiums written and/or booked reserves

• Companies net written premiums exceed $50 million

• SPECIAL PURPOSE INSURERS (“SPI”)

• TYPICAL SECUITISATION SPECIAL PURPOSE VEHICLE

• SINGLE FULLY FUNDED INSURANCE CONTRACT/SPV ISSUES DEBT

• NOTE PAYMENTS SUBORDINATE TO INSURANCE PAYMENTS

• SPI’S CAPITAL TO BE $1/LICENCE RESTRICTED

• TIMING

• ASSUMING AMENDMENT ACT APPROVED BY LEGISLATURE:

• Current Class 3 companies that would satisfy the criteria for Class 3A or Class 3B will be required to make application to the BMA for reclassification prior to December 31, 2008.

• Any insurer failing to make the required application will cease to be registered as an insurer and the BMA will cancel its registration.

Bermuda Solvency Capital Requirement

(“BSCR”)

Expected losses recordedin loss reserves

Required capital for unexpected losses

Losses

Beginning of year End of year

Regulators view unexpected adverse deviations as “RISK”

Capital is the buffer to absorb the shocks of unexpected adverse deviations.

Capital adequacy should be a function of a company’s risk-profile

AssetsLiabilities

(Expected Losses and Loss

Adjustment Expenses)

Required Capital

As the Company’s risk profile increases, its capital requirement increases as well

Solvency and capital requirements are prescribed for all insurers under the Insurance Act 1978.

Under the existing solvency regime, insurers with varying risk profiles may have the same capital requirement.

Present system is a simple formulaic model that does not adequately reflect the complexities surrounding an insurer’s operations.

Therefore, an insurer writing property catastrophe lines of business would have the same level of required capital as an insurer writing auto liability if the two have the same premium volume and/or reserves.

The BMA, in collaboration with PWC, undertook the task of designing a risk-based capital model that suited the Bermuda insurance market.

The Class 4 market supported the proposal by providing information and feedback throughout the process.

The BSCR assigns additional required capital to insurance companies with greater risk.

Presently, the BSCR will be applied to the Class 4 Insurance market.

MEASUREMENT OF REQUIRED CAPITAL & SURPLUS

Steps:

1) The unexpected adverse variance of major balance sheet classes are estimated within a specified confidence level and risk measure (e.g. 99% TVaR).

2) The individual variances are aggregated, allowing for some diversification benefit and correlation between credit risk and reserve risk, to obtain the total capital requirement.

Calculate capital by estimating the unexpected adverse variance in net assets over a 1 year time horizon at a given risk measure.

BSCR REPRESENTATION

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The BSCR identifies 7 risk areas (fixed income investments, equity investments, interest rate/liquidity risk, premium risk, reserve risk, credit risk and catastrophe risk). Various capital charges are applied to these risk areas to derive required capital.

The information needed to populate the BSCR model is derived from the revised financial statements and Schedules II-VI.

SCHEDULE V – SCHEDULE OF RISK MANAGEMENT

• Assists with qualitative assessment of the insurer’s operations and risk position

• Data for Interest Rate Risk, Catastrophe Risk, Asset/Liability Duration and Gross and Net PMLs, etc.

• “Guidance” projections on operating performance, and material future environmental threats

• Description of risk management process

• Stress and scenario tests

BERMUDA ACCOUNTING DEVELOPMENTS

Jason Carne

BERMUDA ACCOUNTING ENVIRONMENT

• Bermuda market typically uses 3 Primary GAAP’s

– US GAAP

– IFRS

– CANADIAN GAAP

• Some captives elect to waive audit or GAAP Financial Statements and prepare only audited statutory Financial Statements for filing with the BMA.

US GAAP DEVELOPMENTS

• Companies may now elect to record all financial instruments at fair value through net income.

• This includes insurance contracts and investments.

• If company elects fair value option for insurance contracts then this would likely need to be backed out for Regulatory Filing Purposes unless express permission to use fair value accounting is obtained from the BMA.

• We believe electing fair option for investments is largely consistent with existing regulatory model.

• US GAAP also now requires enhanced disclosures around how companies estimate fair value. Preferred, but not required disclosure for regulatory financials

IFRS DEVELOPMENTS

• SEC actively exploring possibility of allowing US Registrants to switch from US GAAP to IFRS. Captives to follow suit?

• Would likely be accompanied by transition from US to International Auditing Standards.

• IFRS prefers insurance companies to discount loss reserves. Also permitted under regulatory rules but if company elects to switch from nominal to discounted under IFRS we believe this a should be discussed with BMA for regulatory filings.

• Longer term project to require all insurance companies to report insurance transactions at fair value under IFRS.

CANADIAN GAAP DEVELOPMENTS

• Announced switch to IFRS in 2011

• Recent changes in Canadian GAAP now consistent with IFRS for investments allowing recognition at fair value.

• We believe statutory accounting would permit fair value accounting for investments also.

Captive Manager Onsite Inspections

OBJECTIVES:

Evaluate the effectiveness and compliance of the corporate governance and internal control systems of the insurance manager and captive insurers

Evaluate the effectiveness of the IT system, particularly in relation to internal controls

Assess compliance with the provisions of the Proceeds of Crime Act 1997 and Proceeds of Crime (Money Laundering Regulations 1998 (“the Regulations”) with respect to identification, record-keeping, reporting, and training procedures in relation to managing “regulated institutions” as defined under Regulation 2(2)(a)(iv) of the Regulations.

Assess the insurance manager’s financial position and adequacy of professional indemnity cover

OBJECTIVES cont’d: Assess the effectiveness of insurance management,

including the timing, adequacy and accuracy of the management reports to the client Boards

Ensure that the captives chosen for inspection meet minimum solvency requirements on an ongoing basis and that the funds available are able to meet exposures for future years

Assess the relationships with external entities such as independent parties and affiliated insurance management companies in other jurisdictions to whom tasks are outsourced

Determine whether the Insurance Manager has the necessary combination of skills and experience to manage captives. These will include both underwriting (life and non-life) and administrative/accounting skills.

METHODOLOGY:

Initial request for Insurance Manager documents

Review information provided from document request list

Interviews with key officials of the Insurance Management Company and, where appropriate, the captives

Financial records and minutes review of manager and captives inspected

Review of client files (sample selection by manager)

Review of outsourcing arrangements

Closing interview with key officials of the Insurance Management Company

Issue report to Insurance Management Company on findings of the assessment

Thank You for Attending !