2021 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 (including reinsurers) must perform and submit as part of their 2021 year-end Capital and Solvency Return. It explains the objective, general methodology, and the specific prescribed stress events, scenarios and reporting fields insurers must complete.

• Financial market scenarios: Quantify impact on the statutory balance sheet of prescribed shocks including equity price declines, alternative investment/real estate and Level 3 asset markdowns, extreme US yield curve widening, credit spread widening by rating, sovereign bond haircuts, foreign currency shocks, inflation/monetary policy scenarios, and a combined scenario.
• Mortgage insurance shocks: Insurers writing mortgage business must apply prescribed default rate shocks (9.47% and 5.5%) and MBS prepayment rate shocks to their exposures.
• Underwriting scenarios: Submit three own underwriting loss scenarios with descriptions, key assumptions, and post stress balance sheet positions (with and without reinsurance), plus occurrence and relative return periods for Property Catastrophe writers.
• Liability loss accumulation scenarios: Complete prescribed scenarios (e.g. a new latent liability 'mass tort' scenario) estimating potential accumulation of liability losses using Net Written Premium and specified risk factors.
• Cyber scenarios: Estimate gross and net loss impacts from prescribed cyber events (IT service outage, ransomware, data breach) affecting top policyholders, and report related premium and return period data.
• General reporting requirements: Use the insurer's ordinary statutory accounting standard, measure impact as at immediate occurrence of the event, base tests on balance sheet position and in force exposures as at 1 January 2022 (or day after fiscal year end if different), report in the reporting currency, describe vendor/internal models used, and confirm where fields are left blank due to no loss exposure.

The instructions are technical reporting guidance rather than a standalone rule change; they operationalise the stress/scenario component of the annual Capital and Solvency Return filing for the relevant insurer class.

Key obligations

• Class 3A insurers must conduct the prescribed stress/scenario tests and submit results as part of the 2021 year-end Capital and Solvency Return.
• Insurers must run stress/scenario tests based on balance sheet position and aggregate in-force exposures as at 1 January 2022 (or the day following fiscal year-end where fiscal year differs from calendar year).
• Insurers must report post stress/scenario impacts on statutory admitted assets, admitted liabilities, and capital and surplus, both with and without reinsurance/loss mitigation effects.
• Insurers must report all stress scenario amounts in the reporting currency.
• Insurers must provide a description of any vendor and/or internal model(s) used, including model, version, and key assumptions/parameters.
• Insurers must confirm in the designated section where fields are left blank due to no loss exposure to a given scenario.
• Insurers writing mortgage business must apply prescribed default rate shocks (9.47% and 5.5%) and MBS prepayment rate shocks and report resulting impacts.
• Insurers must submit three own underwriting loss scenarios with descriptions, assumptions, and pre/post stress balance sheet positions.
• Class 3A insurers writing Property Catastrophe business must report occurrence and relative (aggregate) return periods for each underwriting scenario.
• Insurers/groups must complete prescribed liability loss accumulation scenarios (e.g. new latent liability scenario) using Net Written Premium and specified risk factors.
• Insurers must estimate gross and net losses from prescribed cyber stress scenarios (IT outage, ransomware, data breach) and report related premium and return period figures.

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2022: Balance sheet date and in-force exposure date on which stress/scenario tests must be based (or the day following fiscal year-end if fiscal year does not match calendar year).