Consultation Paper: Bermuda Solvency Capital Requirement Update Proposal (November 2016)

Summary

This is a Bermuda Monetary Authority consultation paper proposing a series of updates to the Bermuda Solvency Capital Requirement (BSCR) standard formula. It sets out revised approaches to several risk charge components and invites industry feedback before any rule changes are finalised.

The proposals apply to all classes of insurer in the commercial regime, namely Class 3A, Class 3B, Class 4, Class C, Class D, Class E and insurance groups. The Authority intends to test the changes in a voluntary trial run during spring 2017 with a view to implementing adjustments for year end filings for financial years beginning on or after 1 January 2017.

• Equity risk: Proposes a revised bucketing approach and new charges (ranging from about 0.6% to 45%) with a correlation matrix replacing the current summation approach, and raises the question of transitional/grandfathering arrangements.
• Premium risk: Presents two options for changing the base exposure measure for Property and Casualty premium risk, including treatment of bound-but-not-incepted and multi-year business.
• Credit risk: Proposes reinstating a 5% capital factor for future premium receivables, reducing the charge on receivables on securities sold, and revising the exposure measure for reinsurance credit risk.
• Other insurance risk (Long-Term): Proposes basing the mortality risk charge on net amount at risk rather than net reserves.
• Dependencies and aggregation: Discusses moving from variance-covariance aggregation to correlation matrix or copula-based approaches for risk aggregation.
• Operational risk and other adjustments: Includes a proposed deferred tax loss-absorbing capacity adjustment capped at 20%, mirroring the operational risk cap.
• Run-off insurers: Proposes requiring run-off insurers to calculate the ECR annually using the BSCR standard formula, with entity-specific parameters permitted for reserve and long-term insurance risks, supported by an annual actuarial report.

The paper poses 23 specific consultation questions across these areas and sets out a timeline for feedback, a trial run, and eventual publication of new rules. Insurers and groups within scope are encouraged, though not required, to participate in the voluntary trial run.

Key obligations

• Interested parties must submit comments and feedback on the consultation proposals to riskanalytics@bma.bm by 31 January 2017.
• Insurers wishing to participate in the voluntary trial run should file the additional trial-run spreadsheets (alongside or separately from the annual filing) by 15 May 2017.
• Run-off insurers using entity-specific parameters for reserve and long-term insurance risk would be required to provide the Authority with an annual actuarial report justifying methodologies, data, assumptions and results.
• Run-off insurers would be required to calculate the ECR annually using the BSCR standard formula once the proposal is adopted.

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

Deadlines

• 30th November 2016: Industry consultation paper published for feedback.
• 31st January 2017: Industry feedback and comments due to riskanalytics@bma.bm.
• 15th March 2017: Authority to revise proposals based on industry feedback and prepare draft rules and additional spreadsheets.
• 15th May 2017: Voluntary trial-run of proposals to be filed as an additional request alongside the usual annual filing.
• 30th June 2017: New rules to be published.
• financial years beginning on or after 1st January 2017: Intended effective date for implementing the BSCR adjustments in year-end filings.