2024 Year-End Stress and Scenario Instructions for Class C, D and E

Summary

This is the Bermuda Monetary Authority's instruction document for the 2024 year-end stress and scenario analysis component of the Capital and Solvency Return, applicable to Class C, Class D and Class E (re)insurers. It sets out prescribed financial market, underwriting, liquidity and technology risk scenarios that these insurers must run and report on their Economic Balance Sheet (EBS), assessed as at 1 January 2025 (or the day after fiscal year-end if different).

• Financial market scenarios (Section A): Insurers must quantify the EBS impact of prescribed shocks R1 to R9, covering equity price falls, alternative investment/real estate and Level 3 asset shocks, yield curve stresses, credit spread widening, combined stresses, foreign currency shocks, sovereign risk haircuts, inflation/deflation scenarios, and a Long Term Liquidity Stress Scenario (R9) with a minimum post-stress liquidity coverage ratio of 105 percent.
• Underwriting scenarios (Section B): Insurers must submit three of their own underwriting loss scenarios with key assumptions and resulting EBS impact, with and without reinsurance/loss mitigation.
• Rating downgrade disclosure (Section C): Insurers must provide qualitative disclosure of the impact on income statement and liquidity of a two-notch (or below A-) downgrade of the Bermuda legal entity.
• Worst-case annual aggregate loss scenario (Section D): Insurers must combine the R5 financial market scenario with their three largest underwriting losses, and also submit an insurer-specific worst-case annual aggregate loss scenario.
• Reverse stress test (Section E): Insurers that perform reverse stress testing must disclose the key assumptions and loss figures that would cause failure; those that do not must calculate the loss size that would breach their Enhanced Capital Requirement.
• Technology risk (Section F): All (re)insurers, including those not underwriting cyber risk, must complete the cyber security and resilience capability questions.

General reporting requirements apply across all sections: amounts must be shown in the insurer's reporting currency and in thousands, the accounting basis used must match statutory reporting so pre-stress EBS figures reconcile, vendor or internal model details used for each scenario must be described, and insurers may confirm blank fields reflect no loss exposure rather than omission.

Key obligations

• Conduct the prescribed financial market stress scenarios R1 through R9 and report post-stress EBS asset, liability and capital/surplus positions as part of the 2024 year-end Capital and Solvency Return
• Run stress and scenario tests based on balance sheet position and in-force exposures as at 1 January 2025 (or the day following fiscal year-end where applicable)
• Report all stress/scenario amounts in the insurer's reporting currency and in thousands
• Provide a description of the vendor and/or internal model(s), including version and key assumptions/parameters, used for each stress/scenario
• Confirm in the designated section where fields are left blank due to no loss exposure, rather than omission
• Submit three insurer-specific underwriting loss scenarios with descriptions, key assumptions and resulting EBS impact (with and without reinsurance/loss mitigation)
• Provide qualitative disclosure of the impact of a two-notch (or below A-) rating downgrade on income statement and liquidity positions
• Submit the combined worst-case annual aggregate loss scenario (R5 plus three largest underwriting losses) and an insurer-specific worst-case scenario with assumptions
• Disclose reverse stress test key assumptions and return periods, or, if reverse stress testing is not performed, calculate and disclose the loss size that would breach the Enhanced Capital Requirement
• Complete Section A and B Technology Risk questions on cyber security and resilience capabilities, regardless of whether the insurer underwrites cyber risk
• For Long-Term (re)insurers, Long-Term groups and dual insurers not meeting the stated exemption thresholds, complete the R9 Long Term Liquidity Stress Scenario and maintain a post-stress liquidity coverage ratio of no less than 105 percent

Applies to

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

Deadlines

• 1 January 2025: Balance sheet date and aggregate in-force exposure date on which insurers must base their stress/scenario tests (or the day following fiscal year-end where the fiscal year does not match the calendar year)