2024 Year-End Stress and Scenario Instructions for Class 4, 3B and Insurance Groups

Summary

This document sets out the Bermuda Monetary Authority's detailed instructions for stress and scenario testing that Class 4 and Class 3B insurers (including reinsurers) and Bermuda Insurance Groups must perform and submit as part of their 2024 year end Capital and Solvency Return. The tests measure how adverse financial market and underwriting shocks would affect each insurer's or group's Economic Balance Sheet, capital and surplus.

• Financial market scenarios: Insurers/groups must quantify impacts from prescribed shocks including a 40% equity price decline, a 40% shock to alternative investments and real estate, yield curve movements, credit spread widening, a combined scenario, foreign currency shocks, sovereign risk haircuts, and inflation/deflation scenarios, following detailed calibration tables in the document.
• Mortgage insurance shocks: Insurers writing mortgage business must shock default rates to 9.47% and, where holding agency MBS or real estate securities, apply prescribed prepayment rate stresses.
• Underwriting loss scenarios: Insurers/groups must run Lloyd's Realistic Disaster Scenarios and other prescribed catastrophe and cyber scenarios, reporting occurrence and aggregate return periods and detailed loss breakdowns.
• Modelling and disclosure: Entities must identify and describe the vendor and/or internal models used for each scenario, including model version and key assumptions, and document any simplifications made in BSCR attachments.
• No loss exposure confirmation: Where an insurer/group has no exposure to a particular scenario, it must use the new confirmation section rather than simply leaving fields blank.
• Cyber stress testing: Insurers/groups with affirmative or non-affirmative cyber exposure must report gross and net losses, premiums, return periods, and provide detailed commentary on cyber underwriting frameworks, risk assessment processes and stress test results.

All results must be calculated on the basis of the insurer's or group's balance sheet position and in force exposures as of 1 January 2025 (or the day after fiscal year end where different), reported in the entity's reporting currency, and submitted as part of the 2024 year end capital and solvency return package.

Key obligations

• Class 4, Class 3B insurers and Bermuda Insurance Groups must conduct the prescribed financial market stress scenarios (R1 through R8) and quantify impacts on their Economic Balance Sheet.
• Insurers/groups must run stress and scenario tests based on balance sheet position and in-force exposures as of 1 January 2025 (or the day following fiscal year end if different).
• Insurers writing mortgage business must apply the prescribed mortgage default rate shock and, where holding agency MBS/real estate securities, apply the prescribed prepayment rate stresses.
• Insurers/groups must run the Lloyd's Realistic Disaster Scenarios catalogue and report occurrence and aggregate return periods for catastrophe events.
• Insurers/groups must disclose the vendor and/or internal model(s) and version(s) used for each stress/scenario, including key assumptions where internal models are used.
• Where no loss exposure exists to a given scenario, insurers/groups must use the designated confirmation section rather than leaving fields blank.
• Insurers/groups with cyber exposure must report gross and net losses, premiums and return periods for affirmative and non-affirmative cyber cover, and provide narrative detail on cyber underwriting framework, risk assessment and stress test results.
• All stress/scenario results and supporting documentation must be submitted as part of the 2024 year-end Capital and Solvency Return, with simplifications and scenario details documented in BSCR attachments.

Applies to

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

Deadlines

• 1 January 2025: Balance sheet date and in-force exposure date on which stress/scenario tests must be based (or the day following fiscal year end where the fiscal year does not correspond to the calendar year).
• 2024 year-end capital and solvency return: Stress/scenario test results must be submitted as part of this return.