2019 Year-End Stress and Scenario Instructions for Class 3A

Summary

This is a BMA instructional document, dated 28 November 2019, setting out the prescribed stress and scenario testing that Class 3A insurers (and reinsurers) must perform and submit as part of their 2019 year-end Capital and Solvency Return. It specifies the exact shocks to apply, the balance sheet date to use, and the reporting conventions to follow.

• Financial market scenarios (R1-R8): Insurers must quantify the impact on statutory assets, liabilities and capital of prescribed shocks: a 40% equity price decline, a 40% decline in alternative investments/real estate and Level 3 assets, an extreme US yield curve widening, widening of credit spreads by rating category, a combined yield curve and credit spread scenario, foreign currency depreciation/appreciation shocks, sovereign bond haircuts for named weaker sovereigns, and inflation/monetary policy scenarios.
• Mortgage insurance shocks: Insurers writing mortgage business must apply prescribed default rate shocks (9.47% and 5.5% scenarios) and, for agency MBS/real estate holdings, apply constant prepayment rate shocks (40%, and lower rates of 10%, 5% and 0% where the 40% CPR produces gains), with commentary required if gains persist.
• Underwriting scenarios: Insurers must submit three of their own underwriting loss scenarios with descriptions, key assumptions and post-stress statutory positions (with and without reinsurance); Class 3A insurers writing property catastrophe business must also report occurrence and relative (aggregate) return periods for each event.
• Liability loss accumulation scenarios: Insurers/groups must complete scenarios estimating potential insurance loss accumulations from liability exposures, including a new latent liability (mass tort) scenario.
• Cyber risk reporting: Groups/(Re)insurers must report detailed cyber risk data including gross and net exposure for policies in force, related and unrelated party business, potential gross exposure for non-affirmative cyber claims, worst-case annual aggregate loss scenarios, and risk appetite/limits documentation.
• General reporting conventions: Tests must be run on the balance sheet position and in-force exposures as at 1 January 2020 (or the day after fiscal year-end if different), reported in Bermuda dollar equivalent, using the insurer's normal statutory accounting basis, with descriptions of vendor or internal models used, and confirmation where fields are left blank due to no loss exposure.

The document is technical instructions rather than a standalone rule change; it operationalises existing Capital and Solvency Return stress-testing requirements for the 2019 year-end filing cycle for Class 3A insurers.

Key obligations

• Class 3A insurers (including reinsurers) must conduct the prescribed stress/scenario tests and submit results as part of the 2019 year-end Capital and Solvency Return
• Insurers must run stress/scenario tests based on balance sheet position and in-force exposures as at 1 January 2020 (or the day following fiscal year-end if different)
• Insurers must report all stress scenario amounts in Bermuda dollar equivalent using the specified exchange rate convention
• Insurers must provide a description of the vendor or internal model(s) used for each stress/scenario, including key assumptions and parameters for internal models
• Insurers must confirm where fields are left blank/omitted that this reflects no loss exposure to that scenario
• Insurers must quantify the impact of stress events R1 through R8 on their statutory balance sheet
• Insurers writing mortgage business must shock default rates to 9.47% and 5.5% and apply prepayment rate shocks to agency MBS and real estate holdings, providing commentary if capital gains persist under lower CPR rates
• Insurers must submit three of their own underwriting loss scenarios with descriptions, assumptions and post-stress statutory positions, with and without reinsurance effects
• Class 3A insurers writing property catastrophe business must report occurrence and relative return periods for each underwriting loss scenario event
• Insurers/groups must complete liability loss accumulation scenarios including a new latent liability (mass tort) scenario
• Groups/(Re)insurers must report detailed cyber risk exposure, loss reserve, and worst-case scenario data, and attach documentation of cyber underwriting risk appetite and limits

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2020: Balance sheet position and aggregate in-force exposures used for stress/scenario tests must be as at this date (or the day following fiscal year-end where fiscal year differs from calendar year)
• 2019 year-end Capital and Solvency Return: Stress/scenario testing results must be submitted as part of this return