Explanatory Memorandum for Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Amendment Rules 2011

Summary

This explanatory memorandum describes proposed amendments to the Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Rules 2008, which govern how Class 4 and Class 3B registered insurers calculate the Bermuda Solvency Capital Requirement (BSCR) and report related solvency information to the Bermuda Monetary Authority. The amendments aim to clarify existing provisions and add new filing and disclosure requirements, particularly for insurers that belong to a group not group-supervised by the Authority. The Authority invited industry comment on the draft rules before finalising them.

• Commencement: The amendment rules are proposed to come into operation on 31 December 2011.
• Underwriting risk defined: A new definition of underwriting risk is introduced, consolidating premium risk, reserve risk and catastrophe risk into a single category, mirroring the existing treatment of market risk.
• Internal model approval revocation: The Authority is given express power to revoke approval of an insurer's internal capital model where it is no longer appropriate for determining the Enhanced Capital Requirement (ECR).
• New quarterly group filing: Insurers that are members of an insurance group for which the Authority is not the group-wide supervisor must submit quarterly financial returns by a specified filing date, to enable timely assessment of solvency and liquidity.
• Interest rate shock increase: The interest rate shock used in Schedule I calculations is increased from 120 basis points to 200 basis points to align with international standards and current economic conditions.
• Expanded risk management disclosures: Schedule V is amended to require additional disclosures on governance structure, intra-group exposures (including a definition of material intra-group transaction), and supporting documentation for probable maximum loss and average annual loss figures.
• Schedule VII consolidation: Schedule VII is amended to reflect the new consolidated underwriting risk category, simplifying completion for insurers.

As a consultation document, these changes were proposed rather than final at the time of publication; the Authority requested comments from the insurance industry and other interested persons by 31 August 2011.

Key obligations

• Insurers who are members of an insurance group for which the Authority is not the group-wide supervisor would be required to submit quarterly financial returns to the Authority by a specified filing date, once the amendment rules take effect.
• Class 4 and Class 3B insurers would be required to retain and make available to the Authority, upon request, supporting documentation used to derive gross probable maximum loss, net probable maximum loss and average annual loss figures.
• Class 4 and Class 3B insurers would be required to provide additional disclosures on governance structure and intra-group exposures in Schedule V of their solvency filings.
• Interested persons and the insurance industry were invited to submit comments on the proposed rules to policy@bma.bm no later than 31 August 2011.

Applies to

Class 4 registered insurers, Class 3B registered insurers, insurers that are members of an insurance group

Deadlines

• 31st August 2011: Deadline for industry and interested persons to submit comments on the proposed amendment rules to policy@bma.bm.
• 31st December 2011: Proposed date on which the amendment rules would come into operation.