2021 Year-End Stress and Scenario Instructions for Class 4 3B and Insurance Groups

Summary

This document sets out the Bermuda Monetary Authority's detailed instructions for the stress and scenario testing that Class 4 and Class 3B insurers (including reinsurers) and Bermuda insurance groups must perform and submit as part of the 2021 year end Capital and Solvency Return. The tests assess how prescribed financial market, mortgage, underwriting (catastrophe) and cyber shocks would affect the insurer's or group's statutory balance sheet, capital and surplus.

• Financial market scenarios: Insurers/groups must quantify the balance sheet impact of eight prescribed shocks (R1 to R8), covering equity price declines, alternative investment/real estate and Level 3 asset write downs, an extreme US yield curve widening, credit spread widening, a combined yield curve/credit spread shock, foreign currency shocks, sovereign bond haircuts, and inflation/monetary policy scenarios.
• Mortgage insurance shocks: Insurers writing mortgage business must apply prescribed elevated default rates (9.47 percent and 5.5 percent scenarios) and must stress mortgage backed security prepayment assumptions (40 percent CPR, with lower rates tested if gains result).
• Underwriting loss (catastrophe) scenarios: Insurers/groups must run Lloyd's Realistic Disaster Scenarios using in force exposures as at 1 January 2022, disclosing vendor/proprietary model specifications and versions, and must calculate both the occurrence return period and the relative (aggregate) return period for each event, including demand surge, storm surge and fire following effects.
• Cyber stress scenarios: Insurers must estimate gross and net losses from prescribed cyber events (widespread IT outage, ransomware, data breach) affecting their top ten cyber policyholders, reporting gross/net premium and loss figures and worst case annual aggregate loss scenarios.
• Reporting mechanics: Amounts must be shown in the reporting currency, reconciled to the 2021 year end statutory balance sheet using standard statutory accounting, and reported using a new confirmation field where there is no loss exposure to a particular scenario instead of leaving fields blank.

The instructions are operational guidance accompanying the annual Capital and Solvency Return filing rather than a standalone rule change, but compliance and actuarial teams at affected insurers and groups need to follow the specified methodologies and disclosures precisely when preparing their 2021 year end submission.

Key obligations

• Class 4, Class 3B insurers/reinsurers and Bermuda insurance groups must conduct the prescribed stress/scenario tests and submit results as part of the 2021 year end Capital and Solvency Return
• Tests must be run based on balance sheet position and in force exposures as at 1 January 2022 (or the day following fiscal year end where the fiscal year differs from the calendar year)
• All stress/scenario amounts must be reported in the insurer's/group's reporting currency and reconciled to the 2021 year end statutory balance sheet using the standard statutory accounting basis
• Insurers/groups must describe the vendor and/or internal model(s) used for each stress/scenario, including model name and version, and key assumptions for internal models
• Where there is no loss exposure to a scenario, insurers/groups must use the provided confirmation field rather than leaving the field blank
• Insurers/groups must quantify the impact of stress events R1 through R8 (equity decline, alternative investments/real estate, yield curve widening, credit spread widening, combined R1-R4, FX shocks, sovereign risk haircuts, inflation scenarios) on the statutory balance sheet
• Insurers writing mortgage business must apply the prescribed default rate shocks and MBS prepayment rate shocks and provide supporting detail where results deviate from expectations
• Insurers/groups must run the Lloyd's Realistic Disaster Scenarios catalogue and calculate both the occurrence return period and the relative/aggregate return period for each event, including all lines of business and noting any deviations
• Insurers must estimate gross and net losses for prescribed cyber stress scenarios (IT outage, ransomware, data breach) affecting their top ten policyholders by cyber exposure, including premium and worst case loss detail

Applies to

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

Deadlines

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