2020 Year-End Stress and Scenario Instructions for Class 4 3B and Insurance Groups

Summary

This is the BMA's instruction document setting out the stress and scenario testing that Class 4, Class 3B insurers and Bermuda insurance groups must perform and submit as part of the 2020 year-end Capital and Solvency Return. It specifies the financial market shocks, mortgage insurance shocks and underwriting loss scenarios to be applied, the methodology for measuring impact, and the data and disclosures required in the filing.

• Scope of testing: Insurers/groups must run stress tests based on balance sheet position and in-force exposures as at 1 January 2021 (or the day after fiscal year-end if different).
• Financial market scenarios: Quantify impact of prescribed shocks including a 40% equity price decline, 40% decline in alternative investments/real estate and Level 3 assets, extreme US yield curve widening, credit spread widening by rating category, combined yield/credit shock, foreign currency shocks, sovereign bond haircuts, and inflation/monetary policy scenarios.
• Mortgage insurance shocks: (Re)insurers writing mortgage business must shock default rates (9.47% and 5.5% scenarios) and, where holding agency MBS/real estate securities, apply prepayment rate shocks (40% CPR, and lower rates if gains result).
• Underwriting loss scenarios: Insurers/groups must run Lloyd's Realistic Disaster Scenarios (RDS) using 1 January 2021 in-force aggregates, disclosing model(s) and versions used, and calculate both occurrence and relative (aggregate) return periods for US and non-US windstorm and earthquake events.
• Reporting requirements: Results must be reported in the reporting currency, reconciled to the 2020 year-end statutory balance sheet, accompanied by descriptions of vendor/internal models and key assumptions, and confirmation provided where fields are left blank due to no loss exposure.
• Cyber risk disclosures: Groups/(re)insurers with cyber exposure must report gross and net exposure for policies in force, related and unrelated party business splits, estimated potential gross exposure for non-affirmative cyber claims, cyber losses paid under non-cyber policies, worst-case annual aggregate loss scenarios, and risk appetite and limits documentation.

The instructions function as a mandatory annex to the 2020 Capital and Solvency Return filing rather than a standalone obligation with its own separate deadline; results are to be submitted as part of that year-end return.

Key obligations

• Class 4 and Class 3B insurers and Bermuda insurance groups must conduct the prescribed stress/scenario tests and submit results as part of the 2020 year-end Capital and Solvency Return.
• Insurers/groups must run stress tests using balance sheet position and in-force exposures as at 1 January 2021 (or the day following fiscal year-end where applicable).
• Insurers/groups must report post-stress statutory asset and liability positions using their ordinary statutory accounting standard, reconciled to the 2020 year-end statutory balance sheet.
• Insurers/groups must disclose the vendor and/or internal model(s), including model version and key assumptions/parameters, used for each stress/scenario.
• Where there is no loss exposure to a given scenario, insurers/groups must confirm this rather than leaving fields blank without explanation.
• (Re)insurers writing mortgage business must apply the specified default rate shocks (9.47% and 5.5%) and, where holding agency MBS/real estate securities, apply the specified CPR prepayment shocks.
• Insurers/groups must run the Lloyd's Realistic Disaster Scenarios using 1 January 2021 in-force aggregates and calculate both occurrence and relative return periods for specified perils.
• Insurers/groups with cyber exposure must report gross/net exposure, related/unrelated party splits, potential exposure estimates for non-affirmative cyber claims, and worst-case loss scenario details, including supporting documentation on risk appetite and limits.

Applies to

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

Deadlines

• 1 January 2021: Balance sheet date and in-force exposure date to be used as the basis for running the stress/scenario tests (or the day following fiscal year-end where the fiscal year differs from the calendar year).
• 2020 year-end Capital and Solvency Return: Stress/scenario test results must be submitted to the Authority as part of this return.