2020 Year-End Stress and Scenario Instructions for Class 3A

Summary

This document sets out the Bermuda Monetary Authority's detailed instructions for the stress and scenario testing that Class 3A insurers (and reinsurers) must perform as part of their 2020 year end Capital and Solvency Return. It prescribes specific financial market shocks, mortgage insurance shocks, underwriting loss scenarios, liability loss accumulation scenarios and cyber risk reporting requirements, and explains how results should be measured and reported.

• Financial market scenarios: Insurers must quantify the impact of prescribed shocks (equity price decline, alternative investments/real estate and Level 3 asset write-downs, extreme US yield curve widening, credit spread widening, combined yield curve and credit spread shock, foreign currency shocks, sovereign bond haircuts, and inflation/monetary policy scenarios) on their statutory balance sheet.
• Mortgage insurance shocks: Insurers writing mortgage business must shock default rates (9.47% and 5.5% scenarios) and, where holding agency MBS/real estate securities, stress prepayment rates (CPR of 40%, with additional stresses at 0%, 5% and 10% if gains result).
• Underwriting scenarios: Insurers must submit three of their own underwriting loss scenarios with descriptions, key assumptions, and post-stress balance sheet positions (with and without reinsurance), plus occurrence and relative return period data for Property Catastrophe business.
• Liability loss accumulation scenarios: Insurers/groups must complete prescribed 'new latent liability' and related mass-tort style scenarios using Net Written Premium and specified risk factors.
• Model and exposure disclosures: Insurers must describe vendor or internal models used (including key assumptions/parameters), confirm where no loss exposure exists for a given scenario, and provide cyber risk exposure details including related party/unrelated business splits, gross and net exposures, location of coverage, risk appetite/limits documentation, and worst-case annual aggregate loss scenario descriptions.

All stress and scenario results must be based on the insurer's balance sheet position and in-force exposures as at 1 January 2021 (or the day following fiscal year end if different from the calendar year), reported in the insurer's reporting currency, and submitted as part of the 2020 year-end Capital and Solvency Return filing.

Key obligations

• Class 3A insurers must conduct the prescribed financial market stress tests (R1 through R8) and quantify the impact on their statutory balance sheet.
• Insurers writing mortgage business must apply the prescribed mortgage default rate shocks and, where applicable, MBS prepayment rate shocks, and report results.
• Insurers must submit three of their own underwriting loss scenarios with descriptions, assumptions, and post-stress balance sheet impacts (with and without reinsurance).
• Class 3A insurers writing Property Catastrophe business must report occurrence and relative (aggregate) return periods for each underwriting loss scenario.
• Insurers/groups must complete the prescribed liability loss accumulation scenarios (e.g. new latent liability/mass tort scenario) using Net Written Premium and specified risk factors.
• Insurers must describe the vendor and/or internal models used for each stress/scenario, including model version, key assumptions and parameters.
• Insurers must confirm, using the provided section, where blank/omitted fields reflect no loss exposure rather than an oversight.
• Insurers must run all stress/scenario tests based on balance sheet position and in-force exposures as at 1 January 2021 (or day after fiscal year end) and report in the applicable reporting currency.
• Insurers with cyber risk exposure must provide gross and net exposure data, related party/unrelated business splits, location of coverage, risk appetite and limits documentation, and worst-case annual aggregate loss scenario details.

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2021: Balance sheet date and in-force exposures to be used for running the stress/scenario tests (or the day following fiscal year end where fiscal year does not match the calendar year).