The important role of Directors when ILS loss events arise 

The role of fit and proper persons on the Board of Directors of insurance and ILS structures has become increasingly important as both the nature of the insured risk evolves and the regulatory regime continues to develop.

In Bermuda, given its long history of innovation and acceptance as a leading jurisdiction and domicile of choice for insurance and ILS, the availability of sophisticated directors is broad. 

The development of the industry in Bermuda has necessarily fostered competent, commercial executive and independent directors with a broad level of experience, and diversity of backgrounds. One of the strengths of the Bermuda value proposition has always been the incredible level of expertise that has evolved. 

Another principal reason for the evolution of a concentrated pool of fit and proper persons is the requirement of the Bermuda Monetary Authority, as part of the licensing process, as well as whenever changes to an existing board is proposed, to vet any persons that are proposed to fill a board seat on a licensed insurer. That person has to meet, and continue to meet the fit and proper person test promulgated by the relevant legislation.

This is an incredibly powerful and necessary control given the complexity of the industry and the need to continue to protect and grow the market in a responsible and efficient manner.

The industry and the regulatory framework demands diversification on boards. As loss events creep into ILS, more recent issues such as trapped capital, and the general move to more creative ways in which to employ excess capital evolve, it is more and more important that both the right level of general skill is present on a board but perhaps even more critically, the right diversity of skill and industry experience and background is present to assist in governing the entity through the new risks. One might even use this as a move towards the need for professional directors in the industry.

If one looks at more recent instances, for example in late 2016, the Gator Re Ltd cat bond encountered significant losses from severe thunderstorm activity in the United States. Given the nature of the transaction, there was understandable concern that the matter would become contentious, and there would be challenges around ascertaining the total loss and attachment levels. However, it was shown that this was not the case as the board, with appropriate advisors, efficiently guided the SPI through the loss events that Gator Re Ltd encountered. The direction that was provided clearly would have provided investors with an enhanced level of confidence. 

Given the large amount of capital at risk, it is natural for investors in catastrophe exposed ILS to become unsettled by the prospect of losses attaching to their investments during potential loss events. However, the evolution of the Bermuda domiciled director, both in terms of regulatory requirements and framework and general skill set, continues to provide robust governance for the industry.

This article first appeared in Artemis. Click here to view the original report.


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