2023 Year-End Stress and Scenario Instructions for Class 3A

Summary

This BMA document sets out the mandatory stress and scenario testing instructions that Class 3A insurers (and reinsurers) must follow as part of their 2023 year-end Capital and Solvency Return. It prescribes specific shocks to apply to the insurer's Economic Balance Sheet to assess capital adequacy under adverse financial market and underwriting conditions, and specifies how results must be measured, valued and reported.

• Financial market scenarios: Apply prescribed shocks for equity price declines, alternative investments/real estate and level three assets, yield curve movements, credit spread widening, a combined scenario, foreign currency shocks, sovereign bond haircuts, and inflation/deflation scenarios.
• Mortgage insurance shocks: Insurers writing mortgage business must shock default rates to 9.47% and those holding agency MBS/real estate securities must apply prescribed Constant Prepayment Rate shocks.
• Underwriting loss scenarios: Submit three own underwriting loss scenarios with descriptions, key assumptions, and post-stress EBS positions (with and without reinsurance), plus occurrence and relative return periods for property catastrophe writers.
• Liability loss accumulation scenarios: Complete prescribed scenarios (including a new latent liability mass tort scenario) applying risk factors to net written premium.
• Cyber scenarios: Model ransomware and data breach events affecting top policyholders and report gross/net losses, premiums and return periods.
• Worst case annual aggregate catastrophe loss scenario: Provide details of the scenario used, including policy limits, frequency and severity assumptions, for affirmative cyber coverage.
• General reporting rules: Use the EBS accounting standard, report immediate post-event impacts as of the balance sheet date, report in the reporting currency, describe vendor/internal models used, and confirm where fields are blank due to no loss exposure.

The instructions are technical and prescriptive, giving specific stress magnitudes (e.g., 40% declines, basis point spread widenings, currency depreciation percentages, sovereign bond haircuts) that insurers must apply mechanically rather than through discretion, with results feeding into the BSCR model and year-end return submission.

Key obligations

• Class 3A insurers must conduct the prescribed stress/scenario tests and submit results as part of the 2023 year-end capital and solvency return.
• Insurers must run stress/scenario tests based on balance sheet position and in-force exposures as of 1 January 2024 (or the day following fiscal year-end if fiscal year differs from calendar year).
• Insurers must report all stress/scenario amounts in the reporting currency and reconcile pre-stress EBS capital and surplus to the 2023 year-end economic balance sheet using the accounting standard ordinarily used for EBS reporting.
• Insurers must describe the vendor model(s) and version(s) used for each stress/scenario, or key assumptions and parameters if an internal model is used.
• Insurers must confirm in a designated section where fields are left blank due to no loss exposure to a given scenario.
• Insurers must quantify impacts of prescribed financial market scenarios (equity decline, alternative investments/real estate, yield curve, credit spread widening, combined scenario, FX shocks, sovereign risk, inflation/deflation) on their economic balance sheet.
• Insurers writing mortgage business must shock their mortgage book default rate to 9.47% and applicable MBS holdings using prescribed Constant Prepayment Rate assumptions.
• Insurers must submit three of their own underwriting loss scenarios with descriptions, key assumptions and post-stress EBS positions, and use these in the worst-case annual aggregate catastrophe loss calculation.
• Class 3A insurers writing property catastrophe business must report occurrence and relative return periods for each underwriting loss scenario.
• Insurers must complete prescribed liability loss accumulation scenarios, including a new latent liability (mass tort) scenario, using net written premium and specified risk factors.
• Insurers must model prescribed cyber scenarios (ransomware, data breach) affecting top policyholders and report gross and net losses, premiums, and return periods for affirmative cyber cover.
• Insurers must provide details of the scenario used to derive the worst-case annual aggregate loss, including policy limits, frequency and severity assumptions.

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2024: Balance sheet date and aggregate in-force exposures date on which stress/scenario tests must be based (or the day following fiscal year-end where fiscal year differs from calendar year).