Guidance Notes for Applications for Adjustments Under Section 6D of the Insurance Act

Summary

This BMA guidance note explains how commercial insurers and insurance groups can apply for adjustments to the standard Bermuda Solvency Capital Requirement (BSCR) framework under section 6D of the Insurance Act 1978. It introduces a new Schedule of Adjustments to the relevant Prudential Standards Rules and organises permitted adjustments into a three-route framework, with increasingly detailed requirements for more complex modifications.

• Route 1 (Simple Adjustments): Covers straightforward items such as material reinsurance/risk mitigation treatment, LPT premium removal, early BSCR rule adoption, and use of certain external credit ratings; requires supporting analysis, BSCR-consistent assumptions, and reliable data.
• Route 2 (Simple-Complex Adjustments): Covers modification of premium/reserve risk factors and more complex risk mitigation techniques; requires all Route 1 items plus a minimum 120% ECR ratio, calibration standards, statistical rigour, annual validation and documentation.
• Route 3 (Complex Adjustments): Covers use of internal credit ratings and other applications within the spirit of the framework where the adjusted BSCR is at least 10% below standard BSCR; requires a dedicated governance framework, use test, independent annual validation, and detailed documentation, plus extensive additional criteria for internal credit ratings (risk identification, methodology, data governance, independence/conflicts of interest, ongoing review, and limits such as a 20% cap on assets using internal ratings).
• Other adjustments: Includes items such as Economic Balance Sheet construction using other regulatory frameworks, transitional discounting arrangements, yield curve determination, long-term liability and structured security approvals, and Minimum Solvency Margin modifications, with requirements scaled to complexity.
• Administrative process: Insurers must submit a formal application pack demonstrating that relevant requirements are met; complex (typically Route 3) cases are encouraged to have preliminary discussions with the BMA before applying.
• Annual review: BMA approvals under section 6D are subject to annual regulatory review, requiring insurers to submit a package demonstrating continued compliance with the applicable route's standards.
• Transitional arrangements: Adjustments already granted that fall outside the revised regime (with no material changes) receive transitional treatment: insurers with liability duration under five years get a five-year transition (two years renewal then linear phase-out over three years); insurers with liability duration of five years or more get a transition equal to their liability duration (capped at ten years), with five years of renewal followed by linear phase-out over the remaining years (capped at five years).

The guidance applies to commercial general business insurers (Class 3A, 3B and 4), commercial long-term business insurers (Class C, D and E) and insurance groups subject to the relevant Prudential Standards Rules.

Key obligations

• Insurers seeking a section 6D adjustment must submit a formal application pack providing evidence that the relevant route's requirements are met, along with any additional material requested by the BMA.
• Insurers relying on approved section 6D adjustments must submit an annual application package demonstrating ongoing compliance with the standards of the applicable route.
• Route 2 and Route 3 applicants must maintain documentation covering internal sign-off, data governance, methodology, expert judgement and validation results, and must undergo annual (Route 2) or independent annual (Route 3) validation of the modification.
• Route 3 applicants using internal credit ratings must meet extensive requirements on risk identification, methodology, data and expert judgement documentation, independence from underwriting/investment decisions, ongoing review and re-rating, and must observe limits including a cap of internally rated assets at no more than 20% of total investments and a prohibition on using internal ratings for related, affiliated or connected assets.
• Insurers with adjustments falling outside the revised regime that wish to retain transitional treatment must have no material changes affecting the adjustment and must follow the applicable transition schedule (five-year or duration-based, capped at ten years).

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

• annually: BMA approvals under section 6D are subject to annual regulatory review requiring insurers to submit a package demonstrating ongoing compliance.
• five-year transition (renewed for first two years, then linear phase-out over subsequent three years): Transitional arrangement for insurers with liability duration of less than five years holding adjustments that fall outside the revised section 6D regime.
• transition period equal to liability duration, capped at ten years (renewed for first five years, then linear phase-out over remaining years capped at five years): Transitional arrangement for insurers with liability duration of five years or more holding adjustments that fall outside the revised section 6D regime.
• 2024 yearend BSCR submission: Liability duration used to determine the applicable transitional arrangement is based on the 2024 yearend BSCR submission.