Consultation Paper - Economic Balance Sheet Framework (December 2014)

Summary

This is a Bermuda Monetary Authority consultation paper proposing a new Economic Balance Sheet (EBS) framework for regulatory reporting and solvency assessment of commercial insurers and insurance groups. It sets out valuation principles for assets, liabilities and technical provisions, explains how the EBS would feed into the Capital and Solvency Return (C&SR) and Enhanced Capital Requirement (ECR), and proposes a phased implementation timetable with transitional measures.

• Scope: Applies to Bermuda commercial insurers (Class C, Class D, Class E, Class 3A, Class 3B and Class 4), insurance groups and Bermuda groups for which the Authority is group supervisor.
• Valuation approach: Assets and other liabilities generally valued at fair value in line with GAAP; technical provisions valued as best-estimate cash flows discounted at a risk-free rate plus a risk margin.
• Reporting mechanism: A new EBS Schedule would be added to the C&SR, with existing Schedules referencing the statutory balance sheet (Form 1A/4) adjusted to refer to the EBS Schedule instead.
• Continuing statutory filings: Insurers must still file statutory financial statements under Section 15 of the Insurance Act 1978 until the Authority revises the statutory reporting basis.
• Implementation timetable: Class 3B, Class 4 insurers and Insurance Groups: effective 1 January 2016, first filing 2017. Class 3A insurers: effective 1 January 2017, first filing 2018. Class C, D, E insurers: effective 1 January 2016 with first filing in 2017, subject to a two-year partial-EBS transition for insurance reserves. Groups and Dual licence insurers (Long-Term insurers also holding a Class 3B or 4 licence): full EBS requirements, including Long-Term technical provisions, from 1 January 2016.
• Consultation process: The Authority invites industry and other interested parties to comment on the proposals and the associated draft legislation.

Because this is a consultation paper rather than a final rule, the obligations described are proposed and subject to change following industry feedback; the only immediate, binding action is the requirement to submit comments by the stated deadline.

Key obligations

• Submit comments on the EBS framework proposals and associated draft legislation to policy@bma.bm no later than Friday, 30 January 2015
• Insurers must continue to provide statutory financial statements under Section 15 of the Insurance Act 1978 until the Authority revises the statutory basis of financial reporting
• Once implemented, affected insurers and groups must value assets, liabilities and technical provisions on the EBS basis and report them via a new EBS Schedule within the Capital and Solvency Return, per the class-specific effective dates and first-filing years set out in the timetable
• Long-Term business insurers must continue calculating reserves (lines 20-27 of the statutory financial return) on the existing statutory basis during the proposed two-year partial-EBS transition period for Class C, D and E insurers
• Insurers seeking to treat a capital instrument as capital rather than a liability on the EBS, consistent with a Section 56 direction, must apply to the Authority for an appropriate direction under Section 6C of the Act

Applies to

Bermuda commercial insurers (Class C, Class D, Class E, Class 3A, Class 3B, Class 4), insurance groups, Bermuda groups, Long-Term business insurers, Dual licence insurers (Long-Term insurers also holding a Class 3B or Class 4 licence)

Deadlines

• Friday, 30th January 2015: Deadline for industry and interested parties to submit comments on the EBS framework consultation paper and draft legislation
• 1st January 2016: Proposed effective date of EBS framework for Class 3B and Class 4 insurers, Insurance Groups, Class C, Class D and Class E insurers, and full EBS requirements for Groups and Dual licence insurers
• 2017: First filing under the EBS framework for Class 3B, Class 4 insurers, Insurance Groups, and Class C, D, E insurers (on a partial EBS basis for the latter)
• 1st January 2017: Proposed effective date of EBS framework for Class 3A insurers
• 2018: First filing under the EBS framework for Class 3A insurers
• two-year transition period: Partial EBS basis transition for calculation of insurance reserves for Class C, D and E insurers (year-end 2016 and 2017 filings)