Consultation Paper - Guidance Note on Actuary's Opinion on EBS Technical Provisions (December 2015)

Summary

This is a Bermuda Monetary Authority consultation paper seeking industry comment on a draft Guidance Note setting out the Authority's expectations for the Actuary's Opinion (AO) on Technical Provisions within the new Economic Balance Sheet (EBS) framework. The EBS framework took effect on 1 January 2016 and the draft Guidance Note would replace existing reserve opinion requirements for commercial insurance classes and groups.

• Scope: Applies to Class 3A, 3B, 4, C, D and E insurers and Insurance Groups (collectively 'commercial insurers'); Limited Purpose Insurers (Class 1, 2, 3, A, B) and Special Purpose Insurers are unaffected and remain under existing GN3, GN4, GN9 and GN10 guidance.
• Fit and proper criteria: The Actuary must maintain good standing with an approved actuarial body, meet Continuing Professional Development requirements, and confirm in a Letter of Undertaking that they can communicate directly with the board without management review.
• Reasonableness standard: The AO shifts from opining on 'adequacy' of reserves to opining on the 'reasonableness' of best estimate technical provisions plus confirmation the risk margin was evaluated per legislative requirements.
• Premium provisions: For general business, the Actuary's Opinion must now cover the unearned premium element (previously outside scope), since EBS requires assessment of expected future claims and expenses on unearned business.
• Consolidation: The EBS AO must cover consolidated technical provisions across an insurer's group, not just the legal entity, with allowance for the Actuary to rely on others' work product if disclosed.
• Transitional treatment: Incumbent Loss Reserve Specialists, Approved Actuaries and Group Actuaries do not need re-approval, but must be able to make all required declarations under the new Opinion; if not, they must resign and a new appointment must be proposed.
• Dual-licensed insurers: Must continue appointing both a Loss Reserve Specialist and an Approved Actuary, though one person may fill both roles subject to fit and proper criteria for each.
• Long-term business transfers: Section 25(3) actuarial reports for transfers of long-term business remain governed by GN10, but the new fit and proper/approval criteria in the draft Guidance Note would apply to the actuary involved.

The Authority invited general comments on the draft Guidance Note, to be sent to riskanalytics@bma.bm by 26 February 2016. A formal EBS Actuary's Opinion was not required for the upcoming EBS Trial Run, though actuaries were encouraged to consider anticipated issues in preparing future Opinions.

Key obligations

• Commercial insurers (Class 3A, 3B, 4, C, D, E) and Insurance Groups must obtain an Actuary's Opinion on the reasonableness of EBS technical provisions once the Guidance Note is finalised, covering the first financial year commencing on or after 1 January 2016
• The appointed Actuary must demonstrate continued good standing and CPD compliance with an approved actuarial body at appointment and at each Opinion date
• The Actuary must provide a Letter of Undertaking confirming direct, unmediated access to and from the board
• Incumbent Loss Reserve Specialists, Approved Actuaries and Group Actuaries who cannot satisfy the declarations required under the new Opinion must resign, requiring the insurer to propose a new appointment
• Dual-licensed insurers must continue to appoint both a Loss Reserve Specialist and an Approved Actuary as required by the Insurance Act 1978
• Interested parties must submit comments on the draft Guidance Note to riskanalytics@bma.bm no later than 26 February 2016

Applies to

Class 3A insurers, Class 3B insurers, Class 4 insurers, Class C insurers, Class D insurers, Class E insurers, Insurance Groups, Loss Reserve Specialists, Approved Actuaries, Group Actuaries

Deadlines

• 26th February 2016: Deadline for submitting comments on the draft Guidance Note to riskanalytics@bma.bm
• 1st January 2016: EBS framework, including valuation requirements, comes into effect for all commercial insurers and Groups