Economic Balance Sheet Framework for Long-Term Insurers (Consultation Paper, August 2012)

Summary

This is a 2012 consultation paper in which the Bermuda Monetary Authority (BMA) sets out a proposed economic balance sheet (EBS) framework for long-term (life) insurers, following on from an earlier general 2010 discussion paper. It proposes a principles-based approach to valuing assets and technical provisions on a consistent economic basis, sets out a timetable for phasing in EBS reporting, and outlines possible transitional measures. It is a proposal open for industry comment, not yet a binding rule.

• Scope: Applies to Bermuda long-term business insurers in Class C, D and E, and to any insurance group or Bermuda group for which the BMA is group supervisor.
• Data quality: Proposes that data used to build the EBS must be relevant, complete and reliable, with insurers responsible for justifying exclusions, ensuring accuracy, maintaining documentation and a data directory for supervisory review.
• Asset valuation: Proposes financial assets be reported on an economic (generally fair value) basis consistent with international accounting standards, with specific treatment for goodwill, DAC, intangibles, deferred tax assets and affiliate investments.
• Technical provisions: Proposes valuation of long-term liabilities using best-estimate, probability-weighted cash flows plus a risk margin, addressing discount rates, embedded options/guarantees, contract boundaries and assumption-setting.
• Governance: Calls for a sound system of governance and review by suitably qualified persons overseeing the EBS determination process.
• Timetable and transition: Sets out a proposed reporting timetable for moving to an EBS basis and gives examples of possible transitional measures by product type (e.g. term, payout annuities, deferred annuities, GMAB/GMWB, GMDB/GMIB).

As a consultation paper, the document itself does not impose final binding requirements; it invites industry comment on the proposed framework, with the BMA indicating it intends to develop guidance further as international standards evolve.

Key obligations

• Interested parties (the insurance industry and other stakeholders) must submit comments on the proposals to policy@bma.bm no later than Friday, 5 October 2012.
• If adopted, insurers would be required to maintain documentation and a data directory demonstrating that data quality standards (relevance, completeness, reliability) are met for supervisory review.
• If adopted, insurers would be required to value assets on an economic (fair value) basis consistent with international accounting standards, and value technical provisions using best-estimate, probability-weighted cash flows plus a risk margin.
• If adopted, insurers would be required to maintain a governance and review process, using suitably qualified persons, to oversee and approve EBS determinations.
• If adopted, assets valued on an amortised cost basis would need to be evaluated for adequacy at least annually.

Applies to

long-term business insurers (Class C, D and E), insurance groups and Bermuda groups for which the BMA is group supervisor

Deadlines

• Friday, 5th October 2012: Deadline for the insurance industry and other interested parties to submit comments on the consultation paper's proposals to policy@bma.bm