Response to Industry Comments: BSCR Update Proposal, November 2016 (2017-03-15)

Summary

This is the Bermuda Monetary Authority's formal response to industry comments on its November 2016 consultation on updating the Bermuda Solvency Capital Requirement (BSCR) standard formula. It sets out the Authority's final decisions on timing, phase-in, and technical calculation changes across several risk modules, and clarifies new obligations for run-off insurers.

• Timing: Implementation is delayed by one year: BSCR changes are calculated for testing/reporting purposes only for year-end 2017, and enter into force for financial years beginning on or after 1 January 2018 (year-end 2018 for most insurers).
• Grade-in period: A three-year grade-in applies from 2018: insurers calculate ECR under both the current and new regime and reflect 33% of the difference in 2018, 66% in 2019, and 100% (full new regime) in 2020.
• Equity risk: Instantaneous equity shocks now apply to both sides of the balance sheet; the 35% shock is extended to EEA, Hong Kong, Singapore and other developed markets and selected mutual funds; short equity exposures are ignored; negative NAV shocks get a null equity charge.
• Premium risk: Base exposure will be the maximum of estimated net premiums to be earned in the next 12 months and net premium written at year end (a modified option 1).
• Credit risk: No change to premium/securities receivables factors; insurance credit risk charge for future claims will be the maximum of the current and new approach.
• Long-Term other insurance risk: Splitting the charge between lapse-sensitive and non-lapse-sensitive mortality products is agreed in principle but deferred to a later consultation pending calibration work.
• Dependencies, operational risk, other adjustments: Methodology for correlation/dependency structure, operational risk charge, and other adjustments remains unchanged from the original proposal.
• Run-off insurers: Must annually calculate ECR using the standard BSCR formula and standard factors for all risks, apply for a BSCR modification for loss portfolio transfers to avoid double counting, and include supporting actuarial/run-off analysis on reserve risk adequacy and capital sufficiency in annual filings and dividend requests.
• Currency risk: Certain pegged currencies will qualify for a reduced currency shock under criteria to be published in the Authority's Guidance.

A further consultation paper with additional BSCR changes (interest rate risk, risk mitigation techniques, management actions, look-through for equity risk) is expected in the second half of 2017, to be field-tested in year-end 2017 filings and to enter into force for year-end 2018.

Key obligations

• Insurers must calculate BSCR/ECR under the new regime for testing purposes for year-end 2017, while reporting the ECR ratio under the current basis for that year.
• From financial years beginning on or after 1 January 2018, insurers must calculate ECR under both the current and new regime and apply the grade-in percentage (33% in 2018, 66% in 2019, 100% in 2020) to determine the reported ECR.
• Run-off insurers must calculate the ECR annually using the standard BSCR formula and standard BSCR factors for all risks.
• Run-off insurers undertaking loss portfolio transfers must apply to the Authority for a BSCR modification to avoid double counting of exposure in premium and reserve risks.
• Run-off insurers must include, as part of their annual filing, comments and supporting analysis in the actuarial and run-off annual report on the adequacy of standard BSCR reserve risk factors given adverse loss reserve development potential.
• Run-off insurers requesting dividends must submit the BSCR together with actuarial and run-off supporting analysis assessing reserve adequacy and sufficiency of remaining capital, plus details of their capital management strategy and its monitoring.

Applies to

commercial insurers, insurance groups, Long-Term insurers, run-off insurers

Deadlines

• year-end 2017 (financial years beginning on or after 1 January 2017): BSCR changes calculated for testing/reporting purposes only; official ECR ratio still based on the current basis.
• financial years beginning on or after 1 January 2018 (year-end 2018): BSCR changes enter into force; grade-in year one, applying 33% of the difference between current and new ECR calculations.
• financial years beginning on or after 1 January 2019 (year-end 2019): Grade-in year two, applying 66% of the difference between current and new ECR calculations.
• financial years beginning on or after 1 January 2020 (year-end 2020): Grade-in complete; ECR fully reflects the new regime (100% of the difference).
• second half of 2017: Expected publication of a further consultation paper on additional BSCR changes, to be field tested in year-end 2017 filings.