2018 Stress and Scenario Instructions for Class 4 3B and Insurance Groups

Summary

This is the Bermuda Monetary Authority's instruction set for the 2018 year-end Capital and Solvency Return, setting out prescribed stress and scenario tests that Class 4 and Class 3B insurers (and reinsurers) and Bermuda insurance groups must run and report. The tests measure the impact of specified financial market shocks, mortgage-related shocks and underwriting loss scenarios on the insurer's or group's statutory balance sheet as at 1 January 2019 (or the day after fiscal year end where different).

• Financial market scenarios: Insurers/groups must quantify impacts of prescribed shocks including a 40% equity price decline, 40% decline in alternative investments/real estate and level 3 assets, an extreme US yield curve widening, credit spread widening by rating category, a combined scenario, foreign currency shocks, sovereign bond haircuts, and inflation/monetary policy scenarios.
• Mortgage insurance shocks: Insurers writing mortgage business must apply prescribed default rate shocks (9.47% and 5.5%) and constant prepayment rate shocks (40%, with additional 0%, 5%, 10% tests if gains result) to mortgage-related assets and liabilities.
• Underwriting loss scenarios: Insurers/groups must run Lloyd's Realistic Disaster Scenarios (2018 specification) using in-force exposures at 1 January 2019, reporting both occurrence and relative (aggregate) return periods for US and non-US windstorm and earthquake events, disclosing model/version used and key assumptions.
• Reserve stress tests: Insurers/groups must either perform reserve stress tests identifying scenarios that would cause business failure, or, if not performing such tests, calculate the capital clearance to their enhanced capital requirement (ECR) and the loss size/return period that would breach it.
• Terrorism scenario: Insurers/groups must submit the top ten estimated losses (gross and net, with TRIP/reinsurance recoveries) from a two-tonne bomb explosion scenario based on 1 January 2019 in-force policies, with key assumptions disclosed.
• Technology/cyber risk: Insurers/groups writing cyber risk products must disclose cyber policy, premium and claims information and a worst-case aggregate loss scenario; all insurers/groups, even non-cyber writers, must complete the cyber security and resilience capability questions.

All results, model descriptions and key assumptions must be submitted to the Authority as part of the 2018 year-end Capital and Solvency Return, with amounts converted to Bermuda dollar equivalents and reconciled to the insurer's or group's statutory balance sheet.

Key obligations

• Class 4, Class 3B insurers (and reinsurers) and Bermuda insurance groups must run the prescribed financial market stress scenarios (R1 through R8) and report the impact on statutory assets, liabilities and capital and surplus.
• Insurers/groups writing mortgage business must apply the two prescribed mortgage default rate shocks and MBS prepayment rate shocks and report resulting impacts.
• Insurers/groups must run Lloyd's Realistic Disaster Scenarios for US and Non-US windstorm and earthquake perils using exposures in force at 1 January 2019, reporting occurrence and relative return periods and model details.
• Insurers/groups must perform reserve stress tests or, absent such tests, calculate the capital clearance to their ECR and the loss size/return period that would cause a breach.
• Insurers/groups must submit top ten terrorism loss estimates from a two-tonne bomb scenario with gross and net loss detail and key assumptions.
• Insurers/groups writing cyber risk products must disclose cyber policy, premium, claims and worst-case aggregate loss scenario information; all insurers/groups must complete the cyber security and resilience capability questions in the return.
• All stress/scenario results, model descriptions (vendor or internal) and key assumptions must be submitted to the BMA as part of the 2018 year-end Capital and Solvency Return, expressed in Bermuda dollar equivalents.

Applies to

Class 4 insurers, Class 3B insurers, reinsurers, Bermuda insurance groups

Deadlines

• 1 January 2019: Balance sheet date and in-force exposure date to be used for running the stress/scenario tests (or the day following fiscal year-end where the fiscal year differs from the calendar year).