2023 Year-End Stress and Scenario Instructions for Class C, D and E

Summary

This is a set of technical instructions from the Bermuda Monetary Authority (BMA) directing Class C, Class D and Class E insurers and reinsurers on how to perform the stress and scenario testing required as part of their 2023 year-end Capital and Solvency Return. It sets out the specific shocks to apply, the balance sheet date to use, and the additional qualitative and quantitative disclosures the Authority expects.

• General approach: Insurers must measure post stress/scenario impact on Economic Balance Sheet (EBS) assets, liabilities and capital and surplus, using their normal statutory accounting basis, based on balance sheet position and in force exposures as at 1 January 2024 (or the day after fiscal year end if different), reported in the reporting currency and in thousands.
• Financial market scenarios (Section A): Quantify impact of prescribed single factor and combined shocks: equity price decline (R1), alternative investments/real estate and Level 3 asset shocks (R2), yield curve stresses (R3), credit spread widening (R4), a combined R1 to R4 scenario (R5), foreign currency shocks (R6), sovereign bond haircuts (R7), and inflation/monetary policy scenarios (R8).
• Long term liquidity stress (R9): Long Term (re)insurers and Long Term groups must apply mass lapse shocks to all lapsable policies and complete related liquidity source, BEL, account value and cash surrender value tables.
• Underwriting scenarios (Section B): Submit three own underwriting loss scenarios with descriptions, key assumptions, and post stress EBS impact (with and without reinsurance/loss mitigation).
• Rating downgrade disclosure (Section C): Provide qualitative disclosure of the impact on statutory income and liquidity of a two notch or below A minus (whichever is lower) downgrade of the insurer's Bermuda legal entity.
• Worst case aggregate loss scenario (Section D): Submit the aggregate impact of the R5 financial market scenario combined with the three largest underwriting losses, plus the insurer's own extreme but plausible worst case annual aggregate loss scenario.
• Reverse stress test (Section E): If reverse stress testing is performed (per CISSA IX(b)), disclose the key assumptions and loss figures causing failure; if not performed, calculate the loss size that would breach the Enhanced Capital Requirement (ECR) and its return period.
• Technology risk (Section F): All (re)insurers, including those not underwriting cyber risk, must complete the Technology Risk questions on their own cyber security and resilience capabilities.
• Model disclosure: Provide a description of any vendor or internal model used for each stress/scenario, including key assumptions and parameters for internal models; acquiring a vendor model is not mandatory.
• No loss exposure: Where there is no loss exposure to a given scenario, use the new confirmation section rather than leaving fields blank without explanation.

The instructions are technical and prescriptive, effectively forming part of the 2023 year-end regulatory filing package rather than a standalone policy change.

Key obligations

• Class C, D and E insurers and reinsurers must conduct the prescribed stress/scenario tests and submit results as part of the 2023 year-end Capital and Solvency Return
• Run stress/scenario tests based on balance sheet position and in-force exposures as at 1 January 2024 (or the day following fiscal year end where fiscal year differs from calendar year)
• Report all stress scenario amounts in the reporting currency and in thousands
• Provide a description of the vendor and/or internal model(s) used for each stress/scenario, including key assumptions and parameters for internal models
• Use the confirmation section to indicate blank fields result from no loss exposure, rather than leaving them unexplained
• Quantify the impact of financial market scenarios R1 through R8 (equity decline, alternative investments/real estate including Level 3 assets, yield curve stress, credit spread widening, combined R1-R4 scenario, foreign currency shocks, sovereign bond haircuts, inflation/monetary policy scenarios) on the economic balance sheet
• Long-Term (re)insurers and Long-Term groups must apply mass lapse shocks under the R9 liquidity stress scenario and complete associated liquidity source, BEL, account value and cash surrender value tables
• Submit three of the insurer's own underwriting loss scenarios with descriptions, assumptions and post-stress EBS impact (with and without reinsurance/loss mitigation)
• Submit qualitative disclosure of the impact of a two-notch-or-below-A-minus rating downgrade of the Bermuda legal entity on statutory income and liquidity
• Submit a worst-case annual aggregate loss scenario combining the R5 financial market scenario with the three largest underwriting losses, plus the insurer's own extreme but plausible worst-case scenario
• If reverse stress testing is performed, disclose key assumptions, loss figures and return period causing business failure; if not performed, calculate the loss size that would breach the Enhanced Capital Requirement and its return period
• All (re)insurers, including those not underwriting cyber risk, must complete the Technology Risk section on own cyber security and resilience capabilities

Applies to

Class C insurers, Class D insurers, Class E insurers, reinsurers, Long-Term (re)insurers, Long-Term groups

Deadlines

• 1 January 2024: Balance sheet date and in-force exposure date to be used for running the stress/scenario tests (or the day following fiscal year end if the insurer's fiscal year does not match the calendar year)