Guidance Note - Standards and Application Framework for the Use of Internal Capital Models for Regulatory Capital Purposes (Revised September 2012)

Summary

This BMA guidance note sets out the standards and application framework insurers 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 is a revised (September 2012) update of earlier guidance from 2009 and 2011, clarifying the pre-application, application/review, and post-approval processes, and adding considerations for long-term insurers.

• Pre-application process: Insurers must submit a self-assessment (affirmation statements with narrative), an overview of the ICM, a model demonstration, and a documentation gap analysis before formally applying.
• Affirmation statements: Insurers must affirm that the ICM meets a number of general standards prior to commencement of a formal ICM review.
• Application and review: Formal application documents, results acknowledgment and post-approval agreements must be signed by both the CEO and CRO (or equivalent), with evidence the Board has formally approved the ICM for use.
• Costs: Insurers bear fees for external vendors engaged by the Authority to assist in reviewing the ICM, plus a portion of the Authority's internal review costs, and any post-approval requalification costs if the model changes materially.
• Post-approval monitoring: Insurers must comply with ongoing post-approval monitoring, control and reporting requirements agreed as part of the approval conditions.
• Information request: Insurers must be able to provide the qualitative and quantitative documentation, reports, board minutes, validation reports and numerical test results outlined in Attachment C to demonstrate the ICM meets approval criteria.

The framework currently applies to Class 4, Class 3B, Class 3A and Class E insurers (and reinsurers), with Class 3A insurers assessed on a proportionate basis; it is anticipated to extend to long-term Classes C and D once the underlying Rules are revised. The guidance is not itself binding legislation but supplements the Insurance (Prudential Standards) Rules and is applied by the Authority when assessing ICM applications.

Key obligations

• Insurers seeking ICM approval must complete the pre-application process, submitting a self-assessment, model overview, model demonstration and documentation gap analysis.
• Insurers must provide affirmation statements confirming the ICM meets general standards before an ICM review commences.
• Final application, results acknowledgment and post-approval agreement documents must be signed by both the CEO and CRO (or equivalent) and evidence the Board's formal approval of the ICM.
• Insurers must bear fees for external vendors and a portion of the Authority's internal costs associated with reviewing the ICM.
• Insurers must maintain an internal capital target greater than the ECR indicated by the ICM.
• Insurers must comply with post-approval monitoring, control and reporting requirements, including notifying material changes to the ICM that may trigger requalification review.
• Insurers must be able to supply the qualitative and quantitative information, documentation, reports and validation materials specified in the Authority's ICM information request.

Applies to

Class 4 insurers, Class 3B insurers, Class 3A insurers, Class E insurers, reinsurers, (prospectively) long-term Class C and Class D insurers