Consultation Paper on Internal Models (2007-07-18)

Summary

This is a 2007 Bermuda Monetary Authority consultation paper proposing a framework allowing Class 4 insurers to use company specific internal models, instead of or alongside the standard Bermuda Solvency Capital Requirement (BSCR), to help determine their regulatory capital requirement (RCR). It invites industry comment on the proposed approval process and conditions before any rule is finalised.

• Scope: Applies to Class 4 insurers as defined in the Insurance Act 1978, who could submit internal model results from the 2007 statutory year end filing onward, subject to prior Authority approval.
• Approval process: Insurers must apply for and obtain Authority approval before using an internal model, and the Authority may revoke approval if conditions are no longer met.
• Solo entity reporting: Because the Authority regulates at the solo legal entity level, group level internal models must be able to isolate and report results for the Bermuda legal entity separately from group results.
• Governance and use test: The insurer must show the model is approved by its board, used by the board and senior management for business strategy and capital decisions, and not solely for RCR calculation.
• Calibration and statistical tests: The model must generally be calibrated to approximately 99% TVaR (or an equivalent VaR measure) over a one year full run off horizon, with a reconciliation filter applied if a different risk measure is used, and must pass data and validation quality checks.
• Documentation: Insurers must provide detailed documentation of the model's design, methodology, assumptions, risk measures and confidence levels.
• Statutory filing: Even when using an approved internal model, insurers must still submit BSCR data and a reconciliation between internal model data and audited statutory financial statements.

The paper also describes how the Authority will apply reasonableness tests to model results and, where unsatisfied, may set RCR at a level between the internal model result and the BSCR based result, subject always to the insurer's minimum solvency margin as a capital floor. Comments on the proposals were requested by a fixed deadline noted below.

Key obligations

• Interested parties must submit comments on the consultation to the named BMA contacts by September 15, 2007
• An insurer wishing to use an internal model for RCR determination must first apply to and receive approval from the Authority
• Insurers using group level internal models must submit results isolating the Bermuda solo legal entity as well as group level results
• Insurers must demonstrate board approval and integration of the internal model into the enterprise risk management program and senior management decision making
• Insurers must calibrate the internal model to approximately 99% TVaR (or provide a reconciliation via a regulatory filter if using a different risk measure)
• Insurers must provide detailed documentation of model design, methodology, assumptions, risk measures and confidence levels to the Authority
• Insurers using an approved internal model must still submit BSCR data and a reconciliation between internal model data and audited statutory financial statements
• An insurer wishing to revert from an approved internal model back to BSCR only must apply to the Authority for approval to do so

Applies to

Class 4 insurers

Deadlines

• September 15, 2007: Deadline for industry and other interested persons to submit comments on the consultation paper to the Authority
• beginning from the 2007 statutory year end filing: Earliest point from which approved internal model results could be submitted to the Authority for RCR determination