Stakeholder Letter - EBS and BSCR Trial Run Report 2015 (2015-07-17)

Summary

This is a stakeholder letter from the Bermuda Monetary Authority reporting the results of its 2015 trial run testing the Economic Balance Sheet (EBS) framework and proposed Bermuda Solvency Capital Requirement (BSCR) changes for commercial insurers. It summarises industry feedback, the Authority's conclusions, and the resulting adjustments to the prudential rules, and sets out next steps toward full implementation.

• Trial run participation: 65 entities submitted results: ten insurance groups, 33 Property & Casualty (P&C) insurers, and 22 Long-Term (life) insurers, prepared on a consolidated basis and a best efforts basis.
• EBS conclusion: No participants breached the Target Capital Level (120% of the Enhanced Capital Requirement); the EBS framework was confirmed sound to proceed, with minor rationalisation of EBS note disclosures and actuarial opinion wording changed from 'adequate' to 'reasonable'.
• Currency risk charge: Simplified to a single 25% charge on any currency shortfall between assets and liabilities/proxy BSCR; hedging arrangements meeting certain requirements can now be taken into account; the default 35% new-insurer factor was dropped in favour of an iterative first-year calculation.
• Concentration risk: Prudential rules clarified that the charge applies only to invested assets (excluding reinsurance recoveries, deferred tax, etc.); no substantive changes to the module's calibration.
• Geographic diversification: Guidance to be amended to allow simplification of US and other regional zones into single zones; further consideration to be given to applying this to Long-Term protection business.
• Cash and cash equivalents credit risk, and interest rate/liquidity charges: No changes to calibration; impacts were largely negligible except a greater effect on Long-Term insurers under the interest rate/liquidity charge.

Looking ahead, the Authority will run a further trial run during 2016 and will use its powers under Sections 29A and 29B of the Insurance Act 1978 to mandatorily require all commercial insurers and insurance groups to participate on a best efforts basis, ahead of the first regulatory filing under the new regime for the financial year commencing 2016, due to be submitted in 2017.

Key obligations

• The Authority will mandatorily require all commercial insurers and insurance groups to participate in a further EBS/BSCR trial run during 2016, on a best efforts basis, under Sections 29A and 29B of the Insurance Act 1978.
• Commercial insurers and insurance groups must prepare for the first regulatory filing under the revised EBS/BSCR regime for the financial year commencing 2016, to be submitted in 2017.

Applies to

commercial insurers, insurance groups, Property & Casualty (P&C) insurers, Long-Term (life) insurers

Deadlines

• during the course of 2016: Authority will conduct a further mandatory EBS/BSCR trial run for all commercial insurers and insurance groups.
• 2017 (for financial year commencing 2016): First regulatory filing under the new EBS/BSCR framework is to be submitted.