2019 Year-End Stress and Scenario Instructions for Class 4 3B and Insurance Groups

Summary

This BMA instruction document sets out the prescribed stress and scenario testing requirements that Class 4 and Class 3B insurers (including reinsurers) and Bermuda insurance groups must complete and submit as part of their 2019 year-end Capital and Solvency Return. It specifies the exact shocks, calibrations and reporting conventions to be applied so results are comparable across the sector.

• Financial market scenarios: Insurers/groups must quantify balance sheet impact 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, general credit spread widening by rating category, a combined yield curve/credit spread scenario, foreign currency shocks, sovereign bond haircuts for specified weak sovereigns, and inflation/monetary policy scenarios.
• Mortgage insurance shocks: Insurers writing mortgage business must apply two mortgage default rate shocks (9.47% and 5.5%) and, for MBS/real estate holdings, prepayment rate shocks at a 40% CPR, with additional stress at 0%, 5% and 10% CPR if the base shock produces capital gains.
• Underwriting loss scenarios: Insurers/groups must run Lloyd's Realistic Disaster Scenarios using in-force exposures as at 1 January 2020, disclose model specifications and versions, and calculate both occurrence return periods and relative (aggregate) return periods for each event, including demand surge, storm surge and fire-following effects.
• Cyber risk reporting: Groups/(re)insurers must report gross and net exposure for in-force cyber policies, related versus unrelated party business, potential exposure for non-affirmative cyber claims, worst-case annual aggregate loss scenarios, and attach documentation on cyber underwriting risk appetite and limits.
• General reporting conventions: Amounts must be converted to Bermuda dollar equivalents using specified exchange rate methodology, stress impacts must be measured as at the immediate occurrence of the event, and insurers/groups must describe vendor or internal models used and confirm where blank fields reflect no loss exposure.

These instructions are procedural reporting requirements tied to the 2019 year-end filing cycle and do not create ongoing obligations beyond that submission, though they illustrate the level of detail the BMA expects in future stress/scenario reporting.

Key obligations

• Class 4 and Class 3B insurers (including reinsurers) and Bermuda insurance groups must conduct the prescribed stress/scenario tests and submit results as part of the 2019 year-end Capital and Solvency Return.
• Stress/scenario tests must be run based on balance sheet position and in-force exposures as at 1 January 2020 (or the day following fiscal year-end where the fiscal year differs from the calendar year).
• All reported amounts must be converted to Bermuda dollar equivalents using the specified exchange rate methodology as at 1 January 2020 or the day after.
• Insurers/groups must disclose the vendor and/or internal model(s) and versions used for each stress/scenario, including key assumptions and parameters for internal models.
• Where there is no loss exposure to a particular scenario, insurers/groups must use the confirmation section rather than simply leaving fields blank.
• (Re)insurers writing mortgage business must apply the specified default rate shocks (9.47% and 5.5%) and MBS prepayment rate shocks (40% CPR, with 0%/5%/10% CPR stress if gains result).
• Insurers/groups must run Lloyd's Realistic Disaster Scenarios and calculate both occurrence return periods and relative/aggregate return periods for each event, disclosing all key assumptions and calculations.
• Groups/(re)insurers must report detailed cyber risk exposure data (gross/net exposure, related/unrelated party business, potential exposure for non-affirmative claims, worst-case loss scenarios) and attach supporting risk appetite documentation.

Applies to

Class 4 insurers, Class 3B insurers, reinsurers, Bermuda insurance groups (where the Authority is Group Supervisor)

Deadlines

• 1st January 2020: 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 does not correspond to the calendar year).