Consultation Paper on Eligible Capital (September 2009)

Summary

This is a 2009 Bermuda Monetary Authority consultation paper proposing a new tiered capital system to determine which capital instruments count as regulatory capital for insurers. It sets out proposed definitions, a three-tier classification of capital quality, and a timetable for phasing the regime in, and invites industry comment before finalisation.

• Tiered structure: Proposes classifying insurers capital instruments into Tier 1 (highest quality, loss-absorbing in all circumstances), Tier 2 (protects policyholders on winding-up/insolvency but limited going-concern absorbency) and Tier 3 (limited protection), with eligibility limits applied against the Minimum Margin of Solvency (MSM) and Enhanced Capital Requirement (ECR).
• Scope and phasing: Initially proposed for Class 3B and Class 4 insurers effective December 31 2011, with Class 3A insurers to follow later after further consultation, in line with the proportionality principle.
• Captives and long-term insurers: No changes proposed for the existing captive regime; the tiered system is not yet applicable to Long-term insurers pending a separate solvency regime consultation.
• ECR/TCL extension: Proposes extending the Enhanced Capital Requirement and Target Capital Level (120% of ECR) to Class 3B insurers from December 31 2010 and Class 3A insurers from December 31 2011.
• Groups: Anticipates applying the tiered capital system to insurance groups once the Authority becomes group-wide supervisor, subject to a forthcoming group-wide supervision consultation.
• Consultation process: Invites written comments from the insurance industry and other interested persons, to be sent to policy@bma.bm by November 30 2009.

As a consultation paper, the document does not itself impose binding rules; it describes proposals on which BMA sought feedback, including illustrative worked examples (Appendix B) of how available capital would be tested against MSM and ECR requirements under the proposed tiers.

Key obligations

• Interested parties must submit comments on the proposed tiered capital system to policy@bma.bm no later than November 30th 2009.
• Once implemented, insurers would need 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.
• Class 3B and Class 4 insurers would be expected to comply with the tiered capital system effective December 31st 2011 (subject to finalisation).
• Class 3B insurers would need to meet the Enhanced Capital Requirement and Target Capital Level from December 31st 2010, and Class 3A insurers from December 31st 2011, under the proposals.

Applies to

Class 3B insurers, Class 4 insurers, Class 3A insurers, Long-term insurers, captive insurers, insurance groups, reinsurers

Deadlines

• November 30th 2009: Deadline for submitting comments on the consultation paper to policy@bma.bm.
• December 31st 2011: Proposed effective date for introducing the tiered capital system to Class 3B and Class 4 insurers.
• December 31st 2010: Proposed date from which Class 3B insurers would need to meet the ECR and TCL.
• December 31st 2011: Proposed date from which Class 3A insurers would need to meet the ECR and TCL.