Consultation Paper on Eligible Capital (December 2010)

Summary

This is a 2010 consultation paper in which the Bermuda Monetary Authority sets out a proposed three tiered eligible capital system for insurers, intended to assess the quality (not just quantity) of capital resources used to meet regulatory capital requirements. It builds on a September 2009 paper and invites industry comment before finalisation.

• Tiered structure: Capital and qualifying debt instruments would be classified into Tier 1, Tier 2 or Tier 3 based on loss absorbency, subordination, permanency, perpetuality and absence of mandatory fixed charges, per criteria in Appendix A.
• Eligibility limits: Each tier would be subject to eligibility limits determining how much can count toward the Minimum Solvency Margin (MSM) and Enhanced Capital Requirement (ECR), with worked examples in Appendices B and C.
• Phased scope: The regime would initially apply to Class E, 3A, 3B and 4 insurers and insurance groups for the 2011 financial year-end, then cascade to Class C and D insurers roughly a year later, subject to proportionality and possible phasing based on trial run results.
• Encumbered assets adjustment: Statutory surplus would need to be adjusted for encumbered/collateralised assets, reallocating amounts from Tier 1 to Tier 2 (or excluding them entirely) based on a prescribed calculation.
• Ancillary capital approval: Off-balance sheet instruments (e.g. letters of credit, contingent capital) would need Authority approval before being counted as ancillary capital.
• Group application: The tiered capital system would also apply to insurance groups for which the Authority is group-wide supervisor, alongside solo entities.

As a consultation paper, the document itself creates no binding rules; it seeks industry feedback on the proposed approach, with comments due to the Authority by a stated deadline. Compliance officers should treat the specific tier criteria, eligibility percentages and implementation dates as proposals pending finalisation, though the paper signals the direction of Bermuda's solvency capital regime.

Key obligations

• Insurers and other interested persons wishing to comment must send comments to policy@bma.bm no later than February 28, 2011
• Under the proposal, insurers would be required to examine and classify each capital and qualifying debt instrument into Tier 1, Tier 2 or Tier 3 based on the criteria in Appendix A
• Under the proposal, insurers would need to obtain Authority approval before including off-balance sheet or debt instruments as ancillary capital
• Under the proposal, insurers with encumbered assets would need to calculate and apply a statutory surplus adjustment reallocating amounts between tiers as set out in Appendix C
• Under the proposal, affected insurers and groups would need to hold available capital sufficient to cover MSM and ECR within tier specific eligibility limits (e.g. minimum Tier 1 proportions, caps on Tier 2 and Tier 3)

Applies to

Class E insurers, Class 3A insurers, Class 3B insurers, Class 4 insurers, Class C insurers, Class D insurers, reinsurers, insurance groups

Deadlines

• February 28, 2011: Deadline for industry and other interested persons to submit comments on the consultation paper to policy@bma.bm
• 2011 financial year-end: Proposed effective date for introducing the tiered capital system to Class E, 3A, 3B and 4 insurers and insurance groups
• One year following implementation for Class E, 3A, 3B and 4 (approximately 2012 financial year-end): Proposed cascading of the tiered capital system to Class C and D insurers, subject to phasing
• 2010 financial year-end: Proposed effective date for applying ECR and TCL to Class 3B insurers
• 2012 financial year-end: Proposed date for applying ECR and TCL capital levels to Class C and D insurers, subject to phasing