Consultation Paper for Legacy Insurance Groups Accounting and Capital Treatment for Corporate Liabilities (2023-10-25)

Summary

This is a Bermuda Monetary Authority consultation paper (guidance notes) proposing supervisory, accounting and capital treatment requirements for Bermuda-regulated Legacy Insurance Groups and Insurers that acquire non-insurance corporate liabilities (such as legacy asbestos and environmental exposures) through LLC transactions. It sets out proposed pre-approval, accounting, capital and reporting rules and invites market feedback before finalisation.

• Scope: Applies to Bermuda-licensed Legacy Insurance Groups and Legacy Insurers conducting legacy business who acquire or take on Corporate Liabilities via LLC transactions, including partial acquisitions or joint ventures.
• Pre-approval: All such LLC transactions require prior BMA approval under the entity's condition of registration, supported by an exposure assessment (capped at 15% of net insurance reserves), an independent solvency or financial opinion, and a run-off plan with stress scenarios.
• Accounting treatment: LLCs are to be accounted for using the equity method (net assets, GAAP basis) rather than consolidated, with the net asset value entered on line 4C of Form 1EBS in the BSCR.
• Capital treatment: A modelled BSCR proforma must be submitted at initial application for review of the minimum capital factor; the Authority will continue monitoring the appropriateness of this factor, and groups may submit their own actuarial volatility analysis consistent with the Section 6D regime.
• Reporting: Requires per-transaction completion of Schedule V(l), assessment of Corporate Liabilities within the Group Solvency Self-Assessment, and disclosure of corporate assets and liabilities per LLC in audited GAAP financial statements.
• Material change interaction: Transactions that also meet the Section 30JA(1)(e) material change definition may combine the Section 30JB(2) notification with the pre-approval application.
• Implementation: The proposed treatment would apply prospectively, with the effective date still to be determined.

As a consultation, the paper is not yet binding; the BMA requested market feedback on the overall proposal by 15 November 2023 before finalising the guidance.

Key obligations

• Legacy Insurance Groups and Insurers must obtain prior BMA approval (under their condition of registration) before entering into any LLC transaction, including partial acquisitions or joint ventures
• Pre-approval applications must include an assessment limiting Liabilities exposure to 15% of the acquiring group's existing total net insurance reserves as at the most recent year-end
• Pre-approval applications must include an independent or third-party solvency or financial opinion on the LLC
• Pre-approval applications must include a run-off plan detailing management's approach to running down the Liabilities, including baseline and alternative stress scenarios and expense/cost projections verified by the risk management function
• Legacy Groups must account for LLCs using the equity method and report net asset value on line 4C of Form 1EBS in the BSCR
• At initial application, Legacy Groups must submit a modelled BSCR proforma for review of the minimum capital factor
• Legacy Groups must complete Schedule V(l) (Schedule of Segregated Accounts) on a per-transaction basis for BSCR disclosure
• Corporate Liabilities must be assessed within the Group Solvency Self-Assessment
• Corporate assets and liabilities per LLC must be disclosed within audited GAAP financial statements
• Insurers considering acquiring an LLC should notify the Authority early in the process
• Market participants should provide feedback on the proposal to the BMA by 15 November 2023

Applies to

Legacy Insurance Groups, Legacy Insurers, Bermuda-regulated Insurers

Deadlines

• 15 November 2023: Deadline for market feedback on the consultation proposal to be submitted to the BMA
• effective date to be determined: The proposed accounting and capital treatment will apply prospectively once implemented, but the effective date has not yet been set