Standards and Application Framework for the Use of Internal Capital Models for Regulatory Capital Purposes (Consultation Paper, 2009-04-30)

Summary

This is a Bermuda Monetary Authority consultation paper setting out a proposed framework for Class 4 insurers (and reinsurers) that wish to use an Internal Capital Model (ICM) instead of the standard Bermuda Solvency Capital Requirement (BSCR) formula to calculate their regulatory capital requirement (RCR). It describes a multi-stage self-assessment, application, review and post-approval monitoring process, and invites industry comment on the draft approach.

• Self-assessment: Insurer completes a set of qualitative and quantitative affirmation statements (Attachment A) covering use test, statistical test, calibration test, validation, documentation, model governance, internal controls and risk categories, approved by senior management (CEO, CFO, CRO) and the Board.
• Formal application: Once self-assessment is confirmed, insurer submits a formal ICM application including a completed initial information request and a non-refundable application fee (currently 50,000 dollars).
• Information provision: Insurer must give complete and timely responses to standardised, insurer-specific and supplemental information requests throughout the review.
• Parallel run requirement: Insurer must calculate its RCR using both the ICM and the BSCR formula for two reporting periods, with at least one period during the review.
• Review and decision: BMA conducts off-site and on-site review, aims to decide within six to nine months of receiving the formal application, and may grant full or conditional approval, request further remediation, or refuse the application (with a right of written representation under Section 5 of the relevant Order).
• Post-approval obligations: Approved insurers must notify the Authority of material changes to the ICM's design, assumptions or risk profile, and remain subject to periodic reviews and possible revocation of approval if conditions are breached and not cured.

As a consultation paper, the framework is not yet in force; the Authority invited comments on the proposed structure, timeline, self-assessment process, risk categories and information requests by 31 May 2009, with a final version intended for publication by 30 June 2009. It also noted a related ORSA consultation paper was expected by 30 September 2009.

Key obligations

• Interested persons must submit comments on the draft framework to the Authority's Actuarial Services Department by 31 May 2009
• Applicant insurers must complete the self-assessment affirmation statements, approved by senior management and the Board, before an ICM review can commence
• Applicant insurers must submit a formal ICM application with the initial information request and pay the (currently 50,000 dollar) non-refundable application fee
• Applicant insurers must provide complete and timely responses to all standardised, specific and supplemental information requests during the review
• Insurers must calculate RCR under both the ICM and the BSCR formula for two reporting periods, at least one occurring during the review process
• Approved insurers must advise the Authority of material changes to their ICM's design, assumptions or risk profile
• Insurers whose ICM approval conditions are breached must cure the breach within the time allowed or risk revocation of approval

Applies to

Class 4 insurers, reinsurers

Deadlines

• May 31, 2009: Deadline for industry and interested persons to submit comments on the consultation paper to the Authority's Actuarial Services Department
• June 30, 2009: Date by which the Authority intended to publish a final version of the framework
• September 30, 2009: Expected date for the Authority to release a related consultation paper on the Own Risk and Solvency Assessment (ORSA) regime
• six to nine months following receipt of the formal application: Target period within which the Authority aims to render a formal decision on an ICM application