Guidance Note - Internal Capital Models (Standards and Application Framework for the Use of Internal Capital Models for Regulatory Capital Purposes) (Revised July 2015)

Summary

This is a Bermuda Monetary Authority guidance note explaining the standards and process insurers and insurance groups must follow if they wish to use an Internal Capital Model (ICM) instead of the standard Bermuda Solvency Capital Requirement (BSCR) to calculate their Enhanced Capital Requirement (ECR). It updates the Authority's 2012 guidance, extending scope to Class C and Class D insurers and adding group-specific considerations. The note is not itself a binding rule but sets out how the Authority will apply its existing Rules under the Insurance Act 1978 when reviewing ICM applications.

• Pre-application process: Insurer submits a self-assessment (affirmation statements), an overview of the ICM, a model demonstration, and a documentation gap analysis to show readiness for review.
• Affirmation statements: Insurer must affirm its ICM meets general standards, including passing a use test, before an ICM review can begin.
• Formal application: Once pre-application is confirmed complete, insurer submits a formal application with an initial information request response, a documentation index, and the application fee.
• Review process: The Authority conducts a thorough on-site and off-site model review, including qualitative and quantitative information requests and numerical/statistical tests (Attachment C).
• Post-approval monitoring: Approved ICMs are subject to ongoing monitoring, post-approval reporting, and possible requalification (with additional fees) if the model changes materially or is found no longer fit for purpose.
• Governance sign-off: Key documentation (pre-application submission, application form, results acknowledgment, approval agreements) must be signed by both the CEO and CRO (or equivalent), with evidence of Board approval of the ICM.
• Fees: Insurers bear pre-application entry fees, a non-refundable ICM application fee (scaled to model complexity), and possible external vendor/validation costs and post-approval requalification fees.
• Group considerations: Guidance applies to both group and solo-entity ICMs; approval of a group ICM may or may not extend to entity-level approval depending on whether it appropriately reflects entity-level risk.

The guidance applies only to the Authority's approval of an ICM used to determine an insurer's regulatory capital (ECR) and does not cover use of internal models for other purposes. It is intended to be applied proportionately, with each application assessed on its own merits rather than through prescriptive rules.

Key obligations

• An insurer seeking ICM approval must demonstrate a comprehensive and effective risk management approach and a prudent capital management approach, including an internal capital target above the ECR indicated by the ICM.
• An insurer must complete the pre-application process (self-assessment, model overview, model demonstration, documentation gap analysis) before submitting a formal ICM application.
• An insurer must provide signed approval from its CEO and CRO (or equivalent) and evidence of Board approval on key ICM documentation, including the pre-application submission, application form, results acknowledgment, and approval/use agreements.
• An insurer must pay a fee to enter the pre-application process and a non-refundable application fee for the ICM review, plus any applicable external vendor or post-approval requalification costs.
• An insurer must submit an initial information request response and an index of documentation mapped to the Authority's information request as part of the formal application.
• An insurer using a partial ICM must provide clear justification, acceptable to the Authority, that a full ICM is not reasonable or feasible.

Applies to

insurers, reinsurers, insurance groups, Class C insurers, Class D insurers, Class 3A insurers, Class 3B insurers, Class 4 insurers, Class E insurers