2024 Year-End Stress and Scenario Instructions for Class 3A

Summary

This document sets out the Bermuda Monetary Authority's prescribed stress and scenario testing instructions for Class 3A insurers (including reinsurers) to be completed as part of their year-end Capital and Solvency Return (BSCR). It explains the methodology, assumptions and reporting requirements for assessing how adverse financial market and underwriting shocks would affect an insurer's Economic Balance Sheet (EBS).

• Financial market scenarios: Eight prescribed single-factor and combined shocks (R1 to R8) covering equity price declines, alternative investments/real estate, yield curve movements, credit spread widening, combined stresses, foreign currency shocks, sovereign risk haircuts, and inflation/deflation scenarios, each with specified stress magnitudes.
• Mortgage insurance shocks: Insurers writing mortgage business must shock default rates to 9.47% and, where holding agency MBS/real estate securities, apply prepayment rate stresses (40%, then 10%, 5% and 0% if gains persist).
• Underwriting loss scenarios: Insurers must submit three of their own underwriting loss scenarios with descriptions, key assumptions, and post-stress EBS positions (gross and net of reinsurance), including occurrence and aggregate return periods for property catastrophe writers.
• Cyber scenarios: Insurers writing affirmative cyber cover (and those encouraged to assess non-affirmative exposure) must report gross/net losses, premiums, return periods, and worst-case annual aggregate loss scenarios, plus narrative detail on their cyber underwriting framework, policy language efforts, stress test results and risk assessment governance.
• General reporting requirements: Insurers must use their standard EBS accounting basis, report in the reporting currency, describe any vendor or internal models used, and confirm where blank fields reflect no loss exposure rather than omission.

Tests must be run on the insurer's balance sheet position and in-force exposures as of 1 January 2025 (or the day after fiscal year-end where different), with results submitted as part of the year-end capital and solvency return, including attachments detailing methodologies, simplifications and scenario details.

Key obligations

• Class 3A insurers (and reinsurers) must run all prescribed stress/scenario tests (R1 to R8) using balance sheet position and in-force exposures as of 1 January 2025 (or day after fiscal year-end if different) and report post-stress EBS asset, liability and capital/surplus positions.
• Insurers must describe the vendor and/or internal models used for each stress/scenario, including model, version, key assumptions and parameters.
• Insurers must confirm in a designated section where blank/omitted fields reflect no loss exposure to a scenario.
• Insurers writing mortgage business must shock their mortgage book default rate to 9.47% and report resulting EBS impact.
• Insurers holding agency MBS or real estate securities subject to prepayment risk must apply CPR shocks of 40%, and if that produces capital gains, additionally test 10%, 5% and 0% CPR with commentary if gains persist.
• Insurers must submit three of their own underwriting loss scenarios with descriptions, key assumptions and post-stress EBS positions gross and net of reinsurance, and use these in the Worst-Case Annual Aggregate Catastrophe Loss Scenario calculation.
• Class 3A insurers writing Property Catastrophe Business must report occurrence and relative (aggregate) return periods for each underwriting loss scenario.
• Insurers with affirmative cyber cover must report gross and net losses, premiums, return periods and worst-case annual aggregate loss scenarios distinguishing affirmative and non-affirmative exposure, and provide narrative on their cyber underwriting framework, policy language mitigation efforts, stress test results and risk assessment governance.
• Where the Standard Approach must be substituted for the Scenario Based Approach in a stress due to insufficient SBA-eligible assets, this must be identified in the report attached to the BSCR.
• Any simplifications made in recalculating Risk Margin and BSCR under stress must be documented and included in the report attachment.

Applies to

Class 3A insurers, reinsurers

Deadlines

• 1 January 2025: Balance sheet date and in-force exposure date on which insurers must base their stress/scenario test calculations (or the day following fiscal year-end if it does not correspond to the calendar year).
• as part of the 2024 year-end capital and solvency return: Stress and scenario test results must be submitted to the Authority as part of the insurer's year-end Capital and Solvency Return (BSCR).