2022 Year-End Stress and Scenario Instructions for Class 4, 3B and Insurance Groups

Summary

This BMA document sets out the 2022 year end stress and scenario testing instructions that Class 4 and Class 3B (re)insurers, and Bermuda insurance groups for which the BMA is group supervisor, must follow as part of their 2022 year end capital and solvency return. It prescribes a series of financial market, mortgage, underwriting loss and cyber stress scenarios and specifies how the resulting impact on the statutory balance sheet must be measured and reported.

• Financial market scenarios: Insurers/groups must quantify the balance sheet impact of prescribed shocks including a 40% equity price decline, 40% decline in alternative investments/real estate/level three assets, an extreme US yield curve widening, general credit spread widening by rating category, a combined yield curve/credit spread scenario, foreign currency shocks, sovereign bond haircuts, and inflation/monetary policy scenarios.
• Mortgage insurance shocks: (Re)insurers writing mortgage business must apply two mortgage loan shock scenarios (default rates of 9.47% and 5.5%) and, where holding agency MBS/real estate securities, apply prepayment rate shocks.
• Underwriting loss scenarios: Insurers/groups must run Lloyd's Realistic Disaster Scenarios (2022 specification) for US and non-US windstorm and earthquake perils, calculating both occurrence and relative (aggregate) return periods, using in-force exposures as of 1 January 2023.
• Cyber scenarios: Insurers/groups with cyber exposure must model prescribed cyber events (e.g., ransomware, data breach) affecting their top 10 policyholders by cyber net loss, and report gross and net losses, premiums and worst-case annual aggregate loss scenarios.
• Reporting requirements: Results must be reported in the reporting currency, reconciled to the 2022 year-end statutory balance sheet, with disclosure of vendor/internal model names, versions and key assumptions, and confirmation where there is no loss exposure to a given scenario.

The instructions are procedural/technical guidance for completing a specific section of the capital and solvency return rather than a standalone rule, but compliance with the scenario specifications and reporting format is required for insurers and groups within scope.

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 2022 year-end capital and solvency return
• Stress/scenario tests must be run based on balance sheet position and in-force exposures as of 1 January 2023 (or the day following fiscal year-end if different)
• Results must be reported in the insurer's/group's reporting currency and reconciled to the 2022 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, version, and key assumptions/parameters
• Where there is no loss exposure to a particular scenario, insurers/groups must affirmatively confirm this rather than leaving fields blank
• (Re)insurers writing mortgage business must apply both mortgage loan shock scenarios (9.47% and 5.5% default rates) and related MBS prepayment rate shocks
• Insurers/groups must run the Lloyd's Realistic Disaster Scenarios catalogue and calculate both occurrence and relative return periods for each event
• Insurers/groups with cyber exposure must model the prescribed cyber events affecting their top 10 policyholders by cyber net loss and report gross/net losses and premiums

Applies to

Class 4 insurers, Class 3B insurers, reinsurers, Bermuda Insurance Groups (groups for which BMA is group supervisor)

Deadlines

• 1 January 2023: Balance sheet date and in-force exposure date to be used for running the stress/scenario tests (or the day following fiscal year-end where the fiscal year does not correspond to the calendar year)