BSCR Update Proposal March 2017

Summary

This is a Bermuda Monetary Authority consultation paper (still in draft/consultation status) proposing a package of updates to the Bermuda Solvency Capital Requirement (BSCR) standard formula. It follows and updates an earlier November 2016 consultation and sets out proposed changes across several risk charge areas, together with a timeline for testing, finalising and phasing in the new rules.

• Equity risk: Proposes a new bucketed equity charge structure (5% to 45% by category, e.g. strategic holdings, duration-based, infrastructure, listed developed-market equities, preferred shares, real estate) with a correlation matrix between exposure types, replacing simple additive factor charges.
• Premium risk: Changes the exposure measure for P&C premium risk to an estimate of net premiums to be earned in the next 12 months plus a multi-year exposure component, to better capture bound-but-not-incepted and multi-year contracts.
• Credit risk: Proposes reinstating a 5% capital factor on future premium receivables and revisiting treatment of receivables on securities sold and reinsurance recoverables.
• Other areas covered: Dependencies between premium and reserve risk, operational risk, other BSCR adjustments, BSCR charges for run-off insurers (including additional actuarial and capital management disclosures with dividend requests), currency risk (reduced shocks for certain pegged currencies), and a three-year grade-in period for the overall changes.
• Scope: Proposals would apply, as relevant, to all classes of insurer in the commercial regime: Class 3A, Class 3B, Class 4, Class C, Class D, Class E, and insurance Groups.

At this stage the changes are proposed, not final. The Authority planned to publish draft rules by 31 March 2017 and final new rules by 30 June 2017, with the changes actually taking effect for financial years beginning on or after 1 January 2018, phased in over a three-year grade-in period (2018-2020). A voluntary trial-run spreadsheet filing was requested for spring 2017 to help insurers assess impact ahead of implementation.

Key obligations

• Insurers wishing to rely on the alternative premium risk base exposure measure must have Board approval limiting earned premiums, establish effective control mechanisms, and inform the Authority of the decision and reasons before applying for a BSCR modification.
• Run-off insurers seeking dividend approval must submit actuarial and run-off supporting analysis addressing adequacy of standard BSCR reserve risk factors, adverse loss reserve development, IBNR potential, and sufficiency of remaining capital, plus details of their capital management strategy and its monitoring.
• Once the new rules take effect (financial years beginning on or after 1 January 2018), insurers in the commercial regime must calculate ECR under both the current and new BSCR regimes during the three-year grade-in period and apply the specified blended percentage (33% for 2018, 66% for 2019, 100% for 2020) of the difference.
• Insurers were encouraged (on a voluntary basis) to file the scaled-down trial-run BSCR spreadsheet, alongside or separate from the annual filing, by 15 May 2017.

Applies to

Class 3A insurers, Class 3B insurers, Class 4 insurers, Class C insurers, Class D insurers, Class E insurers, insurance Groups, run-off insurers, Long-Term insurers

Deadlines

• 31st January 2017: Industry feedback on the proposals was due.
• 15th March 2017: Authority to revise proposals based on industry feedback and prepare additional spreadsheets.
• 31st March 2017: Authority to prepare draft rules; instructions for deriving new required inputs to be made available.
• 15th May 2017: Voluntary trial-run of proposals to be filed, alongside or separate from the usual annual filing.
• 30th June 2017: New rules to be published.
• 1st January 2018: New rules enter into force, applying to financial years beginning on or after this date (year-end 2018 for most insurers); start of the grade-in period at 33% of the difference between old and new regime ECR.
• financial year beginning on or after 1 January 2019: Grade-in period step: 66% of the difference between current and new regime ECR calculations applied.
• financial year beginning on or after 1 January 2020: Grade-in period complete: 100% of the difference applied, i.e. ECR fully under the new regime.