2022 Year-End Stress and Scenario Instructions for Class C, D and E

Summary

This document sets out the Bermuda Monetary Authority's instructions for the stress and scenario testing that Class C, Class D and Class E insurers (and reinsurers) must complete and submit as part of their 2022 year-end Capital and Solvency Return. It explains the objective of the exercise (assessing capital adequacy under adverse market and underwriting conditions), the general methodology to be applied, and the specific stress scenarios insurers must run and report.

• Balance sheet date: Tests must be run using the insurer's balance sheet position and in force exposures as at 1 January 2023 (or the day following fiscal year end if this differs from the calendar year).
• Financial market scenarios (Section A): Insurers must quantify the impact on the statutory balance sheet of prescribed shocks including equity price declines, alternative investment and real estate haircuts, extreme US yield curve widening, credit spread widening, sovereign bond haircuts, foreign currency shocks, a combined scenario, and inflation/monetary policy scenarios.
• Mortgage insurance (Section B): Insurers writing mortgage business must apply two prescribed mortgage default rate shocks and MBS prepayment rate shocks to relevant assets and liabilities.
• Underwriting scenarios (Section C): Insurers must submit three of their own underwriting loss scenarios with descriptions, key assumptions, and pre/post stress balance sheet positions (with and without reinsurance/loss mitigation).
• Rating downgrade (Section D): Insurers must provide detailed qualitative disclosure of the income and liquidity impact of a two notch or below A minus rating downgrade of the Bermuda legal entity.
• Worst case annual aggregate loss (Section E): Insurers must combine a financial market scenario (specifically scenario R5) with their three largest underwriting losses, and separately submit an insurer specific worst case annual aggregate loss scenario.
• Reverse stress test (Section F): Insurers performing reverse stress testing under CISSA must disclose key assumptions and loss figures causing failure; insurers not performing reverse stress tests must calculate the loss size that would cause a breach of their enhanced capital requirement.
• Technology risk (Section G): All insurers, including those not underwriting cyber risk, must complete the Technology Risk questions on own cyber security and resilience capabilities, including supporting documentation.
• Model disclosure and no loss exposure confirmation: Insurers must describe the vendor and/or internal models used for each scenario, and may confirm via a dedicated section where fields are left blank due to no loss exposure to a given scenario.

The instructions function as a technical annex to the annual Capital and Solvency Return filing rather than a standalone filing, and results must be reported in the insurer's reporting currency using its ordinary statutory accounting basis.

Key obligations

• Class C, D and E insurers and reinsurers must conduct the prescribed stress and scenario tests and submit results as part of the 2022 year-end Capital and Solvency Return
• Insurers must run the stress and scenario tests based on balance sheet position and in force exposures as at 1 January 2023 (or the day following fiscal year end where applicable)
• Insurers must report post stress/scenario impacts on statutory assets, liabilities, and capital and surplus, both with and without reinsurance or other loss mitigation
• Insurers must provide descriptions of the vendor and/or internal models used for each stress/scenario, including key assumptions and parameters for internal models
• Insurers must confirm in the designated section where fields are left blank due to no loss exposure to a scenario
• Insurers writing mortgage business must apply the prescribed mortgage default rate shocks and MBS prepayment rate shocks and report results, including additional comments if capital gains persist under lower prepayment rates
• Insurers must submit three own underwriting loss scenarios with descriptions, key assumptions and resulting balance sheet impacts
• Insurers must disclose the income statement and liquidity impact of a two notch or below A minus rating downgrade of their Bermuda legal entity
• Insurers must submit a combined worst case annual aggregate loss scenario (financial market scenario R5 plus three largest underwriting losses) and their own insurer specific worst case scenario
• Insurers must complete the reverse stress test disclosure or, if not performing reverse stress tests, calculate the loss size causing a breach of their enhanced capital requirement
• All insurers, including those not underwriting cyber risk, must complete the Technology Risk questions on cyber security and resilience capabilities with supporting documentation

Applies to

Class C insurers, Class D insurers, Class E insurers, reinsurers

Deadlines

• 1 January 2023: Balance sheet position and aggregate in-force exposures used for the stress/scenario tests must be as at this date (or the day following fiscal year end if fiscal year differs from calendar year)
• 2022 year-end Capital and Solvency Return: Stress/scenario test results must be submitted to the Authority as part of this return