Consultation Paper on Capital Add-On and Reduction Policy (2008-06-18)

Summary

This is a 2008 BMA consultation paper proposing a framework for capital add-ons and capital reductions applicable to Class 4 insurers, tied to the introduction of the Enhanced Capital Requirement (ECR) and Target Capital Level (TCL) regime. It sets out when the Authority may adjust an insurer's required capital, the circumstances that could trigger such adjustments, and a proposed administrative and appeals process. Comments from industry and interested persons were invited by a stated deadline; as a consultation paper it does not itself impose binding requirements.

• Solvency levels: Introduces the ECR (100% of BSCR or approved internal model), the TCL (proposed at 120% of ECR) as an early warning threshold, and the statutory Minimum Margin of Solvency (MSM) under Section 6 of the Act.
• Grounds for capital add-ons: Add-ons may be considered for operational risk charge inadequacies, reserve deficiencies or premium inadequacies, significant premium growth, and notifications/reports under Sections 8A(f) and 31AA(1)(b) of the Insurance Act.
• Operational risk self-assessment: Insurers would determine their operational risk charge (proposed range 1% to 10% of ECR) via self-assessment, reviewed by the Authority's Compliance Team during onsite inspections; an add-on may be applied if the self-assessment is found not to reasonably reflect actual risk management.
• Capital reductions: An insurer that believes the BSCR overstates its risk profile may apply to the Authority for a capital reduction, or may apply for credit for hybrid capital regarding non-admitted assets.
• Proposed appeals process: On notice of an intended adjustment, the insurer would have 28 days to make representation to an in-house panel (Risk, Actuary, Supervisory staff); the adjustment would take effect not less than 90 days after notification (or the final panel decision), with further appeal available to a tribunal under Section 44A Part VIIIA of the Act.

Because this is a consultation paper reflecting proposals current as of June 2008 rather than a finalized rule, readers should treat the described add-on/reduction mechanics and timelines as proposals subject to change following industry feedback, and check for any subsequent rule or guidance finalizing this framework.

Key obligations

• Interested parties were invited to submit comments on the proposals to policy@bma.bm no later than July 20, 2008 (consultation response deadline, not an ongoing obligation).

Applies to

Class 4 insurers

Deadlines

• July 20, 2008: Deadline for industry and interested persons to submit comments on the consultation paper's proposals.
• 28 days: Proposed period for an insurer to make representation to the Authority's in-house panel after being notified of an intended capital add-on or ECR adjustment.
• not less than 90 days after notification: Proposed minimum period before a capital add-on or adjustment takes effect if the insurer does not appeal.
• 90 days or longer from the date of the final decision: Proposed effective date for the adjustment following the in-house panel's final decision, if the insurer appealed.
• December 31, 2008: Proposed date as of which the Authority intended to introduce prudential standards relating to the ECR and Capital and Solvency Return (CSR).