Consultation Paper on Bermuda Solvency Capital Requirement (BSCR) (2007-07-18)

Summary

This is a 2007 consultation paper in which the Bermuda Monetary Authority sets out proposals to replace the existing minimum solvency margin approach with a new risk-based Bermuda Solvency Capital Requirement (BSCR) for major commercial insurers and reinsurers. It invites industry comment on the proposed model, target capital concept, supervisory discretion, and expanded reporting, and describes the Authority's intended next steps and transitional approach.

• Scope of application: The new risk-based test would first apply to all Class 4 insurers, with later extension to Class 3 insurers conducting commercial business.
• BSCR model: A standard mathematical model measuring asset, liability, premium and catastrophe risk, calibrated at a 99% TVaR (about 99.6% VaR) over a one-year horizon with full run-off, offering diversification credit of up to 40% on premium risk.
• Target capital level: Insurers subject to the new test would be expected to hold capital at or above a proposed 'target' level of 120% of the risk-based capital requirement, with the Authority able to adjust this threshold in specific circumstances.
• Stress and scenario testing: Insurers would be required to conduct and share standard and company-specific stress and scenario tests to assess vulnerability to extreme events.
• Enhanced reporting: Insurers subject to the risk-based test or an approved in-house model would need to provide an expanded Statutory Financial Return (SFR) covering premiums, reserves, exposures, investments, catastrophe modelling outputs and other data listed in the paper.
• Internal models: Insurers with robust in-house risk models may apply for Authority consent to use those models instead of the standard BSCR model, subject to standards to be set by the Authority.
• Legislative changes: The Authority intends to draft amendments to the Insurance Act and Regulations to formalise the target capital concept, discretionary powers, graduated intervention tools, and SFR amendments.
• Interim implementation: Pending legislative change, Class 4 insurers remain legally subject to the existing statutory minimum solvency margin (MSM), but are expected to cooperate with the Authority in using the risk-based model informally in the interim, with formal reporting expected to apply from the period ending December 2007.

Comments on the proposals were requested from the insurance industry and other interested persons by September 15, 2007, addressed to named Authority contacts. The paper also notes that Class 3 companies writing commercial business would be consulted separately at a later stage.

Key obligations

• Insurers and other interested persons wishing to comment on the BSCR proposals must submit comments to the Authority by September 15, 2007
• Class 4 insurers must continue to meet the existing statutory minimum solvency margin (MSM) under the Act and Regulations until legislation is amended
• Class 4 insurers are expected to cooperate with the Authority in using the new risk-based model to monitor and manage their risks on an informal basis pending legislative change
• Insurers that become subject to the risk-based capital test or use an approved in-house model would be required to submit an expanded Statutory Financial Return with additional data categories
• Insurers using the risk-based model or an in-house model would be required to conduct standard and company-specific stress and scenario testing and share results with the Authority
• Insurers seeking to use an in-house model in place of the standard BSCR model must apply to and obtain consent from the Authority
• Insurers falling below the proposed 120% target capital level may be required to develop action plans or provide more frequent reporting to the Authority

Applies to

Class 4 insurers, Class 3 insurers conducting commercial business, insurers and reinsurers registered under the Insurance Act

Deadlines

• September 15, 2007: Deadline for industry and other interested persons to submit comments on the BSCR consultation paper
• July/early August 2007: Standard risk-based model and user instructions to be issued to Class 4 insurers for review
• period to end-December 2007: Target timing for new legislation to formalize the requirement to report on the new risk-based basis for statutory filings