2023 Year-End Stress and Scenario Instructions for Class 4, 3B and Insurance Groups

Summary

This BMA document sets out the mandatory stress and scenario testing instructions that Class 4 insurers, Class 3B insurers and Bermuda Insurance Groups (including reinsurers) must complete and submit as part of their 2023 year-end capital and solvency return. The tests are designed to assess how adverse financial market and underwriting conditions would affect each insurer's or group's Economic Balance Sheet (assets, liabilities, and capital and surplus).

• Financial market scenarios: Quantify impact on the economic balance sheet of prescribed shocks including a 40% equity price decline, a 40% decline in alternative investments/real estate and level 3 assets, yield curve shifts (moderate/severe widening and tightening), general credit spread widening by rating category, a combined R1 to R4 stress, foreign exchange shocks, sovereign bond haircuts for specified weak sovereigns, and inflation/deflation and monetary policy scenarios.
• Mortgage insurance shocks: Insurers writing mortgage business must stress their mortgage book by raising the default rate to 9.47% and stress agency MBS/real estate holdings for prepayment risk at specified Constant Prepayment Rates.
• Underwriting loss scenarios: Run Lloyd's Realistic Disaster Scenarios (RDS) using in-force exposures as of 1 January 2024, covering US Windstorm, US Earthquake, Non-US Windstorm and Non-US Earthquake groupings, and report both occurrence and relative (aggregate) return periods.
• Cyber scenarios: Model prescribed ransomware and data breach cyber event scenarios affecting the top 10 policyholders by cyber net loss, and report gross and net loss estimates, premiums and return periods for affirmative cyber cover.
• Disclosure and modelling requirements: Describe the vendor or internal model(s) and version used for each stress/scenario, use the accounting standard ordinarily applied for EBS reporting, report all amounts in the reporting currency, and confirm where fields are left blank due to no loss exposure.

All tests must be run using the insurer's or group's balance sheet position and in-force exposures as of 1 January 2024 (or the day following fiscal year-end where the fiscal year differs from the calendar year), with results forming part of the 2023 year-end capital and solvency return submission.

Key obligations

• Class 4, Class 3B insurers and Bermuda Insurance Groups must quantify and report the impact of the prescribed financial market stress scenarios (equity, alternative investments, yield curve, credit spread, combined, FX, sovereign risk, inflation/deflation) on their Economic Balance Sheet
• Insurers writing mortgage business must shock their mortgage book default rate to 9.47% and stress agency MBS/real estate holdings for prepayment risk at specified CPR levels
• Insurers/groups must run Lloyd's Realistic Disaster Scenarios using in-force exposures as of 1 January 2024 and report occurrence and relative return periods for US Windstorm, US Earthquake, Non-US Windstorm and Non-US Earthquake events
• Insurers/groups must model prescribed cyber ransomware and data breach scenarios and report gross and net loss, premiums and return period metrics for affirmative cyber cover
• Insurers/groups must disclose the vendor or internal model(s) and version used for each stress/scenario tested
• Insurers/groups must report all stress/scenario amounts in the reporting currency and confirm where blank fields reflect no loss exposure
• Stress/scenario test results must be submitted to the BMA as part of the 2023 year-end capital and solvency return

Applies to

Class 4 insurers, Class 3B insurers, Bermuda Insurance Groups, reinsurers

Deadlines

• 1 January 2024: Insurers/groups must run stress/scenario tests based on balance sheet position and in-force exposures as of this date (or the day following fiscal year-end if fiscal year differs from calendar year)
• 2023 year-end capital and solvency return: Stress/scenario test results must be submitted as part of this return