Consultation Paper - BSCR Changes (April 2015)

Summary

This is a Bermuda Monetary Authority consultation paper proposing changes to the Bermuda Solvency Capital Requirement (BSCR) standard formula to make it more risk sensitive. It sets out proposed new or revised charges for currency risk, concentration risk, geographic diversification, and cash and cash equivalents, plus consequential structural changes to the interest rate and liquidity risk module. The proposals are being tested alongside the Economic Balance Sheet (EBS) trial run and are open for industry comment.

• Currency risk: Proposes a new capital charge (25% or 30% surcharge) where assets in a currency fall short of liabilities plus a notional BSCR for that currency, with an optional voluntary Solvency II style alternative charge for information purposes.
• Concentration risk: Insurers would need to identify their 10 largest independent exposures (grouping related/connected counterparties) and add the existing market/credit risk charge attributable to those exposures.
• Geographic diversification: Optional adjustment to P&C premium and reserving risk based on splitting premiums and technical provisions across 18 global regions and applying a Herfindahl index based reduction factor.
• Cash and cash equivalents: Replaces the flat 0.3% charge with rating based charges (using Moody's, S&P, A.M. Best and Fitch short-term ratings) ranging from 0.00% to 9.00%, plus a diversification reduction of up to 40%.
• Structural changes: Fixed income funds withheld investments and all fixed income investments (removing the held-to-maturity versus available-for-sale distinction) will be folded into the interest rate and liquidity risk capital assessment for both P&C and long-term insurers.

The proposals apply to all commercial insurance classes (3A, 3B, 4, C, D and E) and to Groups. The Authority invited written comments and voluntary trial run submissions, with draft Prudential Rules to follow and final rules expected by end of June 2015, ahead of a planned 1 January 2016 implementation applied to year end 2016 regulatory returns.

Key obligations

• Insurers and groups wishing to participate should submit comments on the proposed BSCR changes to riskanalytics@bma.bm by Friday, 29 May 2015.
• Insurers and groups participating in the EBS trial run should submit trial run data/results by 29 May 2015.
• Once implemented, affected insurers would need to identify and report their 10 largest independent (including related/connected) counterparty exposures for the concentration risk charge.
• Once implemented, insurers choosing to apply the geographic diversification adjustment would need to split premiums and technical provisions for selected lines of business across statutory zones/regions.
• Once implemented, insurers would need to classify cash, demand deposits and certificates of deposit into BSCR rating classes using ratings from Moody's, S&P, A.M. Best or Fitch.

Applies to

Commercial insurers (classes 3A, 3B, 4, C, D and E), Insurance Groups, P&C insurers, Long-term insurers

Deadlines

• Friday, 29th May 2015: Deadline for comments on the consultation paper and for EBS/BSCR trial run submissions to riskanalytics@bma.bm
• end of June 2015: Authority plans to finalise the Prudential Rules after analysing BSCR trial run results
• 1st January 2016: Proposed changes are planned to come into force, coinciding with the EBS proposals
• year end 2016: Proposed changes are intended to be applied to regulatory returns as at this date
• Q2 2016: Any further BSCR changes proposed later in the year would be subject to a trial run in this quarter