BSCR Update Proposal March 2018

Summary

This is a Bermuda Monetary Authority consultation paper proposing an update to the Bermuda Solvency Capital Requirement (BSCR) standard formula. It follows earlier consultation rounds (November 2016, March 2017 and November 2017) and revises those proposals in light of consultation feedback and a trial-run exercise using 31 December 2016 financial data. It sets out proposed changes across a wide range of BSCR risk modules and describes the remaining steps and timeline before the new rules take effect.

• Scope of insurers: The new rules will apply, as applicable, to all classes of insurers in the commercial regime: Class 3A, Class 3B, Class 4, Class C, Class D, Class E, and Groups.
• Areas covered: Equity risk, premium risk, credit risk, dependencies within premium and reserve risk, overall risk aggregation, operational risk, other BSCR adjustments, treatment of run-off insurers, currency risk, interest rate and liquidity risk, risk mitigation, management actions, look-through, treatment of derivatives, and grade-in/grandfathering provisions.
• Key changes from the November 2017 version: Revised downward interest rate risk shocks and treatment of the long-term forward rate, plus testing of a modified duration based approach for Long-Term insurers; reduced equity risk charges for qualifying private equity holdings; small changes to look-through eligibility criteria; and a revised grade-in formula allowing full incorporation of tax mitigating effects once BSCR changes take effect.
• Equity risk redesign: Introduces an instantaneous balance-sheet shock approach with new equity charge categories (strategic holdings, duration-based, infrastructure, listed/mutual fund equities, preferred share tiers, real estate, letters of credit, other) and a correlation matrix between equity types, replacing the current 5%-55% factor-based bucket approach.
• Process and timeline: Republication of the consultation paper, draft rules and BSCR models taking into account feedback (31 March 2018); a further trial-run using 31 December 2017 financial data (31 May 2018, for both legal entities and groups); a stakeholder feedback letter and publication of final new rules (31 July 2018); and entry into force of the new rules on 1 January 2019, subject to grade-in provisions.
• Feedback channel: Questions on the proposals should be directed to riskanalytics@bma.bm.

As a consultation paper, this document does not itself impose binding requirements; it invites industry feedback and describes proposals and a trial-run exercise that will inform final rules expected to be published on 31 July 2018 and to take effect from 1 January 2019.

Key obligations

• Insurers within the commercial regime (Class 3A, 3B, 4, C, D, E and Groups) are expected to participate in the trial-run of the proposed BSCR changes using financial data as of 31 December 2017, due by 31 May 2018, for both legal entities and groups.
• Once finalised, insurers in the commercial regime will be required to apply the new BSCR rules from year-end filings for financial years beginning on or after 1 January 2019, subject to grade-in provisions.
• Stakeholders wishing to comment on or raise questions about the proposals should direct them to riskanalytics@bma.bm.

Applies to

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

Deadlines

• 31 March 2018: Republication of the consultation paper, draft rules and associated BSCR models taking into account consultation feedback and the 2016 trial-run results.
• 31 May 2018: Trial-run of the proposals using financial data as of 31 December 2017, for both Legal Entities and Groups.
• 31 July 2018: Publication of stakeholder letter on feedback from the consultation process and the two rounds of trial-run, alongside publication of the final new rules.
• 1 January 2019: New BSCR rules enter into force, notwithstanding grade-in provisions.