Consultation Paper - Refinements to the Bermuda Solvency Capital Requirements (June 2013)

Summary

This is a Bermuda Monetary Authority consultation paper proposing refinements to the Bermuda Solvency Capital Requirement (BSCR) framework for insurers and insurance groups. It sets out proposed changes to how capital charges are calculated for investment risk, credit risk, longevity risk and variable annuity risk, plus various miscellaneous and consequential adjustments, and invites industry comment before finalisation.

• Investment risks: Refined asset rating classifications and new capital factors for sovereign debt, corporate bonds, RMBS, mortgage loans, mutual funds, preferred stock, and CMBS/ABS, including an option to use NAIC reclassifications for mortgage-backed securities held below par.
• Credit risk: Revised capital treatment for credit risk exposures, with consequential changes to the credit risk component of the catastrophe risk module for P&C insurers.
• Longevity risk: Introduction of age-specific factors for annuity business and a proposed negative correlation with mortality risk in the diversification formula.
• Variable annuity risk: A new option allowing insurers to use an internal capital model with stress tests (supported by an actuarial memorandum per Appendix I) alongside a refined standard factor-based methodology.
• Long-Term insurers: BSCR changes phased in at 50% for year-end 2013, 75% for year-end 2014, and 100% thereafter.
• P&C insurers: Corresponding changes to common BSCR modules take immediate effect from year-end 2013, as they are expected to reduce capital requirements in most cases.
• Groups: Changes phased in for group BSCR starting at 50% for year-end 2013, rising 10% each year to reach 100% by year-end 2018.
• Disclosure requirements: Companies must disclose the name, type and amount of each mutual fund held, and provide a breakdown of mortgage-backed security values by BSCR rating class before and after any NAIC-based reclassification.

The paper is a consultation document; draft legislation implementing these proposals was published simultaneously for comment. Companies with existing agreed BSCR model adjustments will have those carried over into the revised requirements, and firms facing difficulty with the P&C timing were invited to contact their usual supervisor.

Key obligations

• Insurers and industry stakeholders must submit comments on the consultation paper and draft legislation to riskanalytics@bma.bm no later than close of business on 6 September 2013.
• Long-Term insurers must phase in the revised BSCR at 50% for year-end 2013, 75% for year-end 2014, and 100% for year-end 2015 and thereafter.
• P&C insurers must apply the common BSCR module changes with immediate effect from year-end 2013.
• Insurance groups must phase in the revised group BSCR starting at 50% for year-end 2013, increasing by 10% each subsequent year until reaching 100% for year-end 2018.
• Companies must disclose the name, type and amount of each mutual fund held for BSCR purposes.
• Companies using NAIC reclassification for mortgage-backed securities must provide a separate summary of Form 1/1A/4 values by BSCR rating class both before and after the adjustment.
• Insurers electing to use an internal capital model for variable annuity risk must prepare an actuarial memorandum covering the items set out in Appendix I.

Applies to

Long-Term insurers, Property and Casualty (P&C) insurers, Insurance groups subject to the Insurance (Group Supervision) Rules 2011

Deadlines

• 6th September 2013: Deadline for submitting consultation responses on the paper and draft legislation to riskanalytics@bma.bm.
• year-end 2013: LT insurers phase in revised BSCR at 50%; P&C insurers apply common BSCR changes immediately.
• year-end 2014: LT insurers phase in revised BSCR at 75%.
• thereafter (from year-end 2015): LT insurers apply revised BSCR at 100%.
• year-end 2013 to year-end 2018: Groups phase in revised group BSCR starting at 50% for year-end 2013, rising 10% per year until 100% by year-end 2018.