Response to the Discussion Paper on a Capital and Solvency Framework for Long-Term Insurance (2010-03-31)

Summary

This is the Bermuda Monetary Authority's response to industry feedback on its December 2009 Discussion Paper proposing a new risk-based Capital and Solvency Framework for Long-Term (life) insurers and reinsurers. It summarises stakeholder comments grouped into Process, Application, Technical and Actuarial Standards issues, and sets out the Authority's planned next steps. It does not itself impose final binding rules but signals the direction and timing of the forthcoming capital framework.

• Process issues: Industry raised concerns about the aggressive implementation timeline, insufficient prior consultation for life insurers, and limited time to gather data on the new standards' impact; the Authority acknowledged the tight timeline but confirmed it intends to have new capital standards in place by fall 2010 to align with Europe's third country equivalence assessment.
• Segregated Accounts (Application issues): The Authority will focus in 2010 on developing the capital standards framework generally and will only consider in 2011 how the framework should apply to segregated account (cell) arrangements.
• Technical elements: Feedback covered balance sheet reporting variations, use of a Standard & Poors style model, treatment of Bermuda reinsurance risk, TVaR versus VaR standards, the 20% additional capital add-on, admissibility of intangible assets under Section 56 Directions, factor-based versus internal model approaches, diversification benefits, and raising the 5% capital requirement threshold from 25 million to 50 million dollars; the Authority is engaging an actuarial consulting firm to develop a factor-based approach incorporating this input.
• Actuarial standards: Industry questioned the need for a Bermuda Actuarial Standards Board; the Authority has deferred further consideration of this to a later time given the urgency of the capital standards work.
• Going forward actions: The Authority plans to initially apply new standards only to larger companies with greatest business exposure, maintain ongoing dialogue with industry, consider a licensing class structure for Long-Term insurers reflecting differing risk profiles (including treatment of segregated accounts), phase in full compliance over several years, and allow insurers to apply for a capital reduction if the new requirements unduly penalise their risk profile, particularly during the transition period.

Overall, the document is a consultative status update rather than a final rule; it outlines the Authority's intended approach and invites continued industry engagement as the long-term insurance capital framework is developed through 2010 and beyond.

Key obligations

• Insurers unduly penalised by the new capital requirements may apply to the Authority for a capital reduction, particularly during the transition period

Applies to

Long-Term (Re)Insurers, Long-Term insurance companies operating segregated accounts

Deadlines

• fall 2010: The Authority's goal to have the new long-term insurance capital standards in place, timed for Europe's third country equivalence assessment
• 2011: The Authority will consider how the new capital framework should apply to Segregated Account arrangements