Stakeholder Letter - Consultation Paper on Refinements to the BSCR and Other Legislative Amendments (2013-10-31)

Summary

This is a stakeholder letter from the Bermuda Monetary Authority responding to industry comments on its July 2013 Consultation Paper on refinements to the Bermuda Solvency Capital Requirement (BSCR) and related legislative amendments. It confirms the final positions adopted after consultation, including the commencement date and specific technical changes to capital charges, credit risk treatment, and solvency filing requirements.

• Commencement date: The BSCR rule changes and other legislative amendments take effect from 1st January 2014, applying to all filings submitted on or after that date, including year end 2013 filings.
• Investment risk changes: GNMA, FNMA and FHLMC instruments remain classified as Mortgage-Backed Securities and do not qualify for sovereign debt treatment; the capital charge for All Other Mortgages is reduced from the proposed 35% to 25%.
• Credit risk clarifications: Premiums receivable should be captured under Line 10 (not Line 11) of the balance sheet; the Line 33 offset against reinsurance balances applies only where attributable to a specific reinsurer; funds withheld assets recorded under Schedule IIA are subject to asset capital requirements rather than cedant credit risk charges; reinsurance credit ratings are based on financial strength ratings.
• Best effort basis: Where data for the refined BSCR models or prior year comparatives is not readily available, companies may use reasonable approximations or estimates for year end 2013 filings, provided this is disclosed in the filing.
• Other legislative changes: Minor updates are made to the Insurance (Eligible Capital) Rules 2012 concerning disclosure of insurance contracts and offsetting capital requirements when calculating encumbered assets transferred from Tier 1 to Tier 2; other proposed changes to the Group Supervision Rules, Insurance Returns and Solvency Regulations, and Insurance Accounts Regulations are adopted as proposed.
• Minimum Margin of Solvency (MMS): The MMS is removed from the scope of the audit requirement for Classes 3A, 3B, 4, C, D and E by removing related statements from solvency certificates, though the MMS amount must still be filed as part of the Solvency and Capital Return (BSCR Summary Sheet); for dual licensed entities, the MMS floor becomes effective for Long-Term business from 1st January 2017.
• Future BSCR changes: No further BSCR changes are anticipated in 2014, as the Authority intends to use the following year to develop and assess potential refinements before implementation.
• Model corrections: Errors identified in the draft BSCR models are being corrected, with revised models expected to be available by end of November 2013.

Insurers with particular concerns about the revised requirements are encouraged to raise them directly with their usual Authority contact as soon as possible.

Key obligations

• All filings submitted on or after 1st January 2014, including year end 2013 filings, must comply with the new BSCR and legislative requirements.
• Premiums receivable must be reported under Line 10 of the balance sheet, not Line 11.
• The Line 33 offset against reinsurance balances may only be applied to the extent attributable to a specific reinsurer.
• Where information for the refined BSCR filings or prior year comparatives is not readily available, companies must use reasonable approximations and disclose such estimates in the filing.
• The MMS amount must continue to be filed with the Authority as part of the Solvency and Capital Return (BSCR Summary Sheet).
• For dual licensed entities, the MMS floor applies to Long-Term business effective 1st January 2017.

Applies to

(Re)insurers, Class 3A insurers, Class 3B insurers, Class 4 insurers, Class C insurers, Class D insurers, Class E insurers, dual licensed entities, Special Purpose Insurers

Deadlines

• 1st January 2014: Commencement date for the BSCR rule changes and other legislative amendments; applies to filings submitted on or after this date, including year end 2013 filings.
• end of November 2013: Target date for the Authority to make revised BSCR models available.
• 1st January 2017: Effective date for the MMS floor applying to Long-Term business for dual licensed entities.