2022 Year-End Stress and Scenario Instructions for Class 3A

Summary

This document sets out the Bermuda Monetary Authority's detailed instructions for Class 3A insurers (including reinsurers) on the stress and scenario testing that must be completed and submitted as part of the 2022 year-end capital and solvency return. It explains the objective, general methodology, and the specific prescribed stress events and scenarios insurers must quantify against their statutory balance sheet.

• General instructions: Insurers must report post-stress positions on statutory assets and liabilities, use their normal statutory accounting basis, measure impact as if the event occurred immediately, run tests on their balance sheet position as of 1 January 2023 (or the 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.
• A. Financial market scenarios: Quantify impact of eight single-factor and combined shocks (R1 to R8): equity price decline, alternative investments/real estate and Level 3 asset shocks, extreme US yield curve widening, credit spread widening, combined yield/spread shock, foreign currency shocks, sovereign bond haircuts, and inflation/monetary policy scenarios.
• B. Mortgage insurance: 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, with lower rates tested if gains result).
• C. Underwriting loss scenarios: Submit three own underwriting loss scenarios with descriptions, key assumptions, and post-stress statutory positions (with and without reinsurance); Property Catastrophe writers must also provide occurrence and relative (aggregated) return periods.
• D. Liability loss accumulation scenarios: Complete prescribed scenarios (e.g. new latent liability 'mass tort' event) using net written premium exposure measures and calibrated risk factors.
• Other sections: The document (per elided sections) also covers additional scenarios including cyber risk events such as ransomware and data breach, requiring estimated gross and net loss, premium, and return period reporting.

The instructions are technical and prescriptive, aimed at ensuring comparability of stress results across the Class 3A sector and feeding directly into the Authority's assessment of sector-wide vulnerability to financial market and underwriting shocks.

Key obligations

• Class 3A insurers must conduct the prescribed stress/scenario tests and submit results as part of the 2022 year-end capital and solvency return.
• Run stress/scenario tests based on balance sheet position and in-force exposures as of 1 January 2023 (or the day following fiscal year-end if it differs from the calendar year).
• Report all stress/scenario amounts in the insurer's reporting currency.
• Describe the vendor model(s) and version(s) used for each stress/scenario, or key assumptions and parameters where an internal model is used.
• Confirm in the designated section where fields are left blank due to no loss exposure to a particular scenario.
• Quantify the impact of financial market stress events R1 through R8 on the statutory balance sheet.
• Mortgage business writers must shock default rates as specified (9.47% and 5.5% scenarios) and report effects on assets and liabilities.
• Insurers holding agency MBS/real estate securities must apply prepayment rate shocks and provide additional commentary if capital gains persist under lower CPR assumptions.
• Submit three own underwriting loss scenarios with descriptions, key assumptions, and post-stress statutory asset/liability positions, with and without reinsurance effects.
• Property Catastrophe writers must provide occurrence and relative return periods for each underwriting loss scenario.
• Complete prescribed liability loss accumulation scenarios (e.g. new latent liability scenario) using specified exposure measures and risk factors.
• Report cyber stress scenario impacts (e.g. ransomware, data breach) including estimated gross and net losses, premiums, and return periods for top policyholders by cyber net loss.

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2023: Balance sheet date and in-force exposure date on which insurers must base their stress/scenario test calculations (or the day following fiscal year-end if it does not correspond to the calendar year).