2018 Stress and Scenario Instructions for Class 3A

Summary

This document sets out the Bermuda Monetary Authority's prescribed stress and scenario testing instructions that Class 3A insurers (and reinsurers) must complete as part of their 2018 year-end Capital and Solvency Return. It specifies the stress events, scenarios and reporting conventions insurers must use to quantify the impact of adverse financial market and underwriting conditions on their statutory balance sheet.

• Financial market scenarios: Quantify impact of eight single-factor and combined stress events (equity price crash, alternative investments/real estate decline, extreme US yield curve widening, credit spread widening, combined shock, foreign currency shocks, sovereign risk escalation, and inflation/monetary policy risk) on statutory assets and liabilities.
• Mortgage insurance shocks: Insurers writing mortgage business must apply two prescribed default-rate shocks (9.47% and 5.5%) and MBS prepayment rate shocks (CPR of 40%, and 0%/5%/10% if gains result).
• Underwriting scenarios: Submit three own underwriting loss scenarios with descriptions, key assumptions and post-stress balance sheet positions; Property Catastrophe writers must also provide occurrence and relative (aggregate) return periods for each scenario.
• Liability loss accumulation scenarios: Complete prescribed scenarios (e.g. new latent liability / mass tort event) estimating potential insurance loss accumulations on liability exposures.
• Rating downgrade disclosure: Provide qualitative disclosure of the impact of a two-notch (or below A-) ratings downgrade of the Bermuda legal entity on income statement and liquidity, including collateral, loss payment triggers and claw-backs.
• Worst-case aggregate catastrophe loss: Submit a combined financial market and underwriting loss aggregation scenario, plus the insurer's own worst-case annual aggregate loss scenario and assumptions.
• Reverse stress test / ECR clearance: If reverse stress testing is performed, disclose the key assumptions and loss figures causing business failure; if not, calculate the loss size that would breach the Enhanced Capital Requirement and its return period.
• Technology/cyber risk: Cyber (re)insurers must disclose cyber policies, premiums, claims, largest exposure policy and worst-case cyber loss scenario; all insurers, including non-cyber writers, must complete the cyber security and resilience capability questions.

General reporting rules apply across all scenarios: results must reflect immediate post-stress impact on statutory assets, liabilities, and capital and surplus, use the insurer's ordinary statutory accounting basis, be run on the balance sheet position as at 1 January 2019 (or the day after fiscal year-end if different), and be expressed in Bermuda dollar equivalents. Insurers must describe any vendor or internal models used and may confirm 'no loss exposure' for blank fields rather than leaving them unexplained.

Key obligations

• Class 3A insurers (and reinsurers) must conduct the prescribed stress/scenario tests and submit results as part of the 2018 year-end Capital and Solvency Return.
• Run stress/scenario tests based on balance sheet position and in-force exposures as at 1 January 2019 (or the day following fiscal year-end if different from calendar year).
• Report all stress/scenario amounts in Bermuda dollar equivalent using the specified exchange rate convention.
• Provide a description of the vendor model (including version) or internal model (including key assumptions and parameters) used for each stress/scenario.
• Where there is no loss exposure to a scenario, confirm this in the designated section rather than leaving fields blank without explanation.
• Quantify the impact of each financial market stress event (R1 through R8) on the statutory balance sheet.
• Insurers writing mortgage business must apply the two prescribed mortgage default-rate shocks and MBS prepayment rate shocks.
• Submit three own underwriting loss scenarios with descriptions, assumptions and post-stress statutory asset/liability positions, both with and without reinsurance/loss mitigation effects.
• Property Catastrophe writers among Class 3A insurers must report occurrence and relative return periods for each underwriting scenario.
• Complete the liability loss accumulation scenario(s) (e.g. new latent liability/mass tort) as prescribed.
• Submit qualitative disclosure of the impact of a ratings downgrade of two notches or below A- on income and liquidity positions.
• Submit the worst-case annual aggregate catastrophe loss scenario, combining a financial market scenario with the three largest underwriting losses, plus an insurer-specific worst-case scenario.
• If performing reverse stress testing, disclose key assumptions, loss figures and return period causing business failure; otherwise calculate the loss size causing an ECR breach and its return period.
• Cyber (re)insurers must disclose cyber risk policies, premiums, claims, largest exposure policy, and a worst-case cyber loss scenario; all insurers must complete the cyber security and resilience capability questions.

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2019: Balance sheet date and aggregate in-force exposure date on which stress/scenario tests must be run (or the day following fiscal year-end where fiscal year does not match the calendar year).
• as part of the 2018 year-end Capital and Solvency Return: Stress/scenario test results must be submitted to the Authority together with the 2018 year-end Capital and Solvency Return.