Bermuda’s regulatory sandbox: six years of success

The BMA’s regulatory sandbox has licensed 12 companies, seven of which are now in full insurance classes. 

It has been six years since the BMA introduced its insurance regulatory sandbox and innovation hub. Its team has licensed 12 sandbox companies, with seven now full insurance classes. The BMA’s George Alayon discusses the journey so far and why the concept will continue to benefit Bermuda into the future.

When the Bermuda Monetary Authority (Authority or BMA) introduced its first legislative framework for insurance regulatory sandbox and innovation hub in 2018, it raised, for some, more questions than answers. The industry was keen to understand how this might aid its need to innovate and other regulators looked on, keen to understand the wider implications.

Six years on, George Alayon, deputy director, FinTech Supervision at the BMA, is in a good position to answer many of those questions—and offers a robust assessment of how the concept has performed so far. 

At a very high level, he says, the sandbox has gained traction as a platform for fostering innovation within the insurance sector. Over the past six years, a range of companies—startups and established insurers—have utilised the framework to explore and test innovative business solutions. The numbers, when broken down, look impressive.

In six years, Alayon says, his dedicated team has engaged with some 70 companies, has licensed 12 sandbox companies, and seven of these have graduated into full insurance classes. It has licensed two full class Innovative Insurer General Business (IIGBs) which skipped the sandbox and successfully applied to become fully licensed insurers, and admitted 11 companies in the insurance innovation hub. 

Alayon added that it has been nice to see the breadth of technologies the companies are leveraging. 

“We have seen a number of use-cases from these companies, from the use of artificial intelligence (AI) and machine learning, blockchain technology and decentralised finance applications, digital marketplaces, parametric offerings, digital native platforms as well as crypto-denominated policies as an alternative means to transfer risk and access new capital,” he says.

The framework has been utilised by firms across various insurance lines, including reinsurance, life insurance, and property and casualty insurance. “The sandbox has become an essential tool in driving innovation, allowing companies to refine their technologies and business models before wider market adoption, contributing to Bermuda’s reputation as a leading jurisdiction for insurtech development,” he adds.

“These innovative solutions provided new capacity as well as access to non-traditional sources of capital in the Bermuda market.”

Reflecting on intent

The original intention to create the sandbox was in recognition of the growth of disruptive technologies in the insurance and wider financial sector—and the central role that innovation plays in promoting Bermuda market’s competitive advantage, Alayon recalls.

The primary aim, he says, was to create an environment where innovative insurance products and services could be tested in a controlled and supervised setting. The BMA wanted to encourage the development of new technology-driven solutions, by providing flexibility within the regulatory framework while maintaining key consumer protection and risk management standards. 

“We introduced two parallel tracks: one being the regulatory sandbox to cater to licensable activities; the other being the innovation hub to capture both non-licensable and licensable activities that are early proof-of-concept stage and not yet ready for live testing,” he says. 

“Our purpose was to foster innovation, support the development of emerging technologies, and help insurers and startups navigate regulatory requirements more efficiently. By doing so, the BMA aimed to position Bermuda as a leading global hub for innovative insurance solutions, attracting businesses looking to trial cutting-edge and useful technologies in areas such as, but not limited to, distributed ledger technologies/blockchain, AI, big data analytics, parametric insurance and internet of things applications, among others.”

Alayon explains that the sandbox and innovation hub were designed to serve as a pathway for companies to experiment, learn, and refine their offerings in a controlled manner, allowing for greater agility and creativity in product development. 

Innovation never stops

The BMA has not stopped developing and refining the nature of what the sandbox does. Since 2018, more insurance classes have been added. It now has six sandbox classes to provide a parallel track for innovative insurers and intermediaries, and three new (full) classes. 

“These new classes have been designed to adapt the regulatory framework to evolving industry needs while fostering innovation and protecting consumers,” Alayon says. 

One of the key innovations, he says, was the introduction of the IIGB and Innovative Insurer Long Term (IILT) classes. “These classes allow companies to engage in insurance activities using emerging technologies such as blockchain, AI, or digital assets, among others, providing a pragmatic but fit-for-purpose regulatory oversight for these novel businesses, while maintaining high standards for risk management and policyholder protection,” he says. 

He explains further that these classes were established to accommodate new business models and technologies that don’t fit within the traditional insurance frameworks, allowing more room for experimentation and development. 

“These new classes represent the BMA’s commitment to adapting its regulatory environment based on the lessons learned from sandbox participants, ensuring that Bermuda remains a hub for insurtech development while managing emerging risks effectively,” Alayon says. 

The insurance regulatory sandbox and innovation hub frameworks were part of a broader drive by the BMA towards innovation. In parallel, legislation on Digital Asset Business and Digital Asset Issuance, which were introduced about the same time, allowed these sectors to be fully regulated in Bermuda.

It has meant Bermuda has attracted digital asset insurers and service providers, such as digital currency wallets and payment platforms, fostering an environment where insurers and tech firms collaborate on blockchain-based insurance solutions. 

Going further

More recently, the BMA has looked to expand the concept even further. In 2021,it expanded the mandate of the regulatory sandbox and innovation hub to cover licensing and supervision of innovative business model proposals to address climate change risk and the associated protection gap, in response to the Bermuda government’s climate finance strategy. 

Its goal was to encourage innovators and incumbent players to explore business solutions that would cover environmental, social and corporate governance (ESG) and climate change-related solutions and products. 

“The BMA remains committed to this goal and will continue to be open to facilitate market dialogue and testing to pursue these noble efforts, and help companies achieve their business goals at the same time,” Alayon says.

In theory, it could cover even more sectors in future. In 2021, the BMA published a guidance note to introduce a general sandbox framework available for use by other sectors. 

“The BMA is looking to accelerate its efforts on this to build the appropriate legislative basis to properly regulate these emerging sectors. This approach is in recognition of the lessons learned from insurance and digital asset sectors in relation to financial markets integration brought about by the rapid digitisation of businesses across all sectors,” Alayon says.

Global innovation hub

Alayon believes the combination of all these initiatives has had a number of positive outcomes for Bermuda, cementing its position as a global hub for insurance innovation. “Specifically, these new classes have attracted a diverse range of insurtech firms and innovative financial services to Bermuda, driving economic growth and expanding the Island’s reputation as a leader in digital insurance solutions,” he says.

It has also enhanced Bermuda’s ability to offer risk transfer solutions. “These innovative solutions provided new capacity as well as access to non-traditional sources of capital in the Bermuda market. Such innovative business models will enable Bermuda to contribute further in closing protection gaps in various sectors, as we are seeing now on cyber risk protection and climate finance.

“These developments have solidified Bermuda’s competitive edge and have contributed to the diversification of our Island’s economy and growth.”

Another consequence of the initiative is that it has brought the BMA closer to other global regulators and relevant organisations. The Authority might have been an early adopter of the sandbox, but it was not the first. 

“The BMA carefully studied other key jurisdictions that are relevant to Bermuda before crafting our own, ‘customised playbook’,” says Alayon. The BMA joined and has been actively contributing to international forums such as the appropriate working groups within the International Association of Insurance Supervisors and the Global Financial Innovation Network, to share common experiences, best practices and promote international cooperation. 

“Some jurisdictions have adopted the same approach (sandbox and innovation hub), and a few others didn’t officially adopt these terminologies, but in essence, the approach has been consistently in the form of some levels of industry collaboration to test new ideas and concepts,” he says.

Alayon believes the sandbox and innovation classes have been a resounding success for Bermuda. “In the past six years, a new sub-sector within insurance and outside has been created, further diversifying the Bermuda economy. The companies that have successfully graduated from the sandbox have established themselves in the Island, providing additional risk protection capacity to complement the traditional player, and have created jobs for the Bermuda population,” he says. 

“The innovative frameworks have played (and are playing) a pivotal role in positioning Bermuda as a global leader in insurance innovation and broader fintech developments. As part of the lessons learned, I believe our experience has been that the insurtech/fintech sector can co-exist and complement our already established and mature insurance sector. 

“Our hope is that these two sectors will future-proof Bermuda’s relevance within the international community, not just as the risk capital of the world, but also as a centre for financial services innovation and climate finance,” he concludes. 

Three key ongoing developments

1. Broader scope: Bermuda continues to expand the scope of the sandbox beyond insurance. The inclusion of digital assets, blockchain, AI, and data-driven technologies ensures that the sandbox evolves alongside global financial and technological trends in the key sectors that the BMA regulates. 
2. Innovation hub: The innovation hub works in tandem with the sandbox, encouraging dialogue between the regulator and innovators at earlier stages of development. This has helped build a more collaborative ecosystem where businesses and regulators co-create pathways to market readiness. 
3. Focus on sustainability: The sandbox is increasingly accommodating initiatives related to ESG concerns. Innovations such as climate risk insurance and parametric products addressing natural disasters are emerging as significant areas of focus, particularly as Bermuda remains a key player in global catastrophe insurance and reinsurance markets. 

And some challenges

• Regulatory balance: Bermuda continues to face the ongoing challenge of balancing innovation with appropriate regulatory oversight. As technologies become more complex, the need for pragmatic, rigorous but fit-for-purpose regulations will increase. 
• Cross-border integration: As Bermuda continues to host companies with global reach, ensuring that innovations tested within the sandbox can seamlessly scale across other jurisdictions is a key goal for the BMA. This needs to be balanced with the need to comply to the highest standards on anti-money laundering, combating the financing of terrorism, and sanctions compliance. 
• Adaptation to AI and Big Data: With AI, data-driven models, and algorithmic underwriting becoming more prominent, the BMA will focus on addressing relevant concerns such as accountability, ethical bias, data privacy management and transparency within its framework. 

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