Guidance Notes for Applications for Adjustments under Section 6D of the Insurance Act 1978 (31 March 2024)

Summary

This BMA Guidance Note explains the revised framework under section 6D of the Insurance Act 1978, which allows commercial insurers and insurance groups to apply for adjustments to their standard Bermuda Solvency Capital Requirement (BSCR) calculation where it does not adequately reflect their risk profile. It introduces a new Schedule of Adjustments to the relevant Prudential Standards and organises most adjustment types into three routes of increasing complexity, each with its own scope and requirements.

• Route 1 (Simple): Covers items such as material reinsurance/risk mitigation treatment, LPT premium removal, early BSCR adoption, and use of issuer external ratings; requires supporting analysis, BSCR-consistent assumptions, and demonstrably complete and accurate data.
• Route 2 (Simple-Complex): Covers modification of premium/reserve risk factors and more complex risk mitigation techniques; requires an ECR ratio of at least 120%, rigorous statistical/actuarial support, no cherry-picking, use of 1-in-100 TVaR calibration, annual validation, and defined documentation.
• Route 3 (Complex): Covers use of internal credit ratings and other applications not otherwise covered, subject to conditions including at least a 10% reduction from the standard BSCR; requires a dedicated governance framework, use test, annual independent validation, and detailed documentation, plus extensive additional requirements for internal credit rating methodologies (risk identification, methodology, data/expert judgement controls, independence safeguards, ongoing review, and limits such as a 20% cap on assets using internal ratings).
• Other adjustments: Includes items like variable annuity guarantee risk charge calculations, asset/liability classification, Technical Provisions adjustments (including EBS transitional arrangements for pre-2016 business), yield curve determination, Minimum Solvency Margin modifications, and methodology switches for Interest Rate Risk and Credit and Surety Scenario charges; requirements depend on the nature and complexity of the specific application.

Administratively, insurers must submit a formal application pack evidencing that the relevant route requirements are met, and approved adjustments are subject to annual regulatory review requiring evidence of ongoing compliance. Transitional arrangements apply to adjustments granted before 31 December 2023 that fall outside the revised regime, with phase-out periods depending on the insurer's liability duration.

Key obligations

• Insurers applying for a section 6D adjustment must submit a formal application pack providing evidence that the applicable route's requirements are met, along with any additional material requested by the BMA.
• Insurers with approved section 6D adjustments must undergo annual regulatory review and submit an application package demonstrating ongoing compliance with the applicable route's standards.
• Under Route 2 and Route 3, insurers must conduct annual validation of key aspects of the capital modification (including data, assumptions, models and outputs) and maintain specified documentation (internal sign-off, data governance, methodology, expert judgement, validation results).
• Route 2 applicants must operate at an Enhanced Capital Requirements (ECR) ratio of at least 120% and confirm no other risk areas are understated by the BSCR (no cherry-picking).
• Route 3 applicants relying on internal credit ratings must maintain a governance framework, use test, independent expertise/conflict-of-interest controls, and comply with limits (e.g. internal ratings capped at no more than 20% of total investments and cannot be used for related/affiliated/connected assets).
• For adjustments granted before 31 December 2023 that fall outside the revised regime, insurers must follow the specified transitional phase-out schedule based on their liability duration, absent material changes to the adjustment.
• Insurers seeking Route 3 (complex) adjustments are encouraged to contact the BMA for preliminary discussions before formal application.

Applies to

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

Deadlines

• 31 December 2023: Adjustments granted prior to this date that fall outside the revised section 6D regime qualify for transitional arrangements, provided there are no material changes affecting the adjustment.
• 31 December 2015: Transitional arrangements for certain long-term technical provisions apply to business written on or before this date.
• annually: Section 6D approvals are subject to annual regulatory review requiring submission of an application package demonstrating ongoing compliance.
• annually: Key aspects of Route 2 and Route 3 capital modifications (data, models, assumptions, outputs) must undergo validation each year.
• 2024 year-end BSCR submission: Basis used to determine an insurer's liability duration for purposes of the transitional phase-out schedule.