Guidance Notes for Commercial Insurers and Insurance Groups' Statutory Reporting Regime (30 November 2016)

Summary

This is BMA guidance explaining the statutory and prudential reporting regime introduced in 2015 for commercial insurers and insurance groups, covering how GAAP financial statements, Statutory Financial Statements (SFS) and the Economic Balance Sheet (EBS) fit together to determine capital requirements. It sets out the valuation principles for the EBS, technical provisions, and transitional arrangements for long term business.

• GAAP financial statements: Section 17A of the Insurance Act requires commercial insurers to prepare financial statements under IFRS, GAAP applicable in Bermuda, Canada, the UK or the US, or other GAAP recognised by the Authority, audited by an approved auditor.
• Consolidated and unconsolidated SFS: Consolidated GAAP financial statements (subject to prudential filters) form the basis of the EBS and ECR; insurers must also file unconsolidated statutory balance sheet, income statement and statement of capital and surplus used for MSM, liquidity and class of registration purposes.
• Condensed statements option: Class 3A, Class C and Class D insurers may opt to produce condensed consolidated GAAP financial statements with abbreviated notes, in the format prescribed in the Insurance Account Rules, still subject to audit.
• EBS valuation guidance: Detailed guidance is given on valuing EBS line items (investments, affiliates, real estate, receivables, payables, letters of credit, etc.) and on calculating technical provisions, including best estimate cash flows, discount rates, risk margin and variable annuity guarantees.
• Transitional arrangements: Insurers may apply to the Authority to phase in EBS based technical provisions for long term business written on or before 31 December 2015, using a linear interpolation formula running from year end 2015 to full EBS application at year end 2031.

The guidance is explanatory and interpretive, clarifying how existing legislative amendments (Insurance Accounts Rules, Prudential Standards Amendment Rules 2015) operate in practice rather than creating new standalone legal requirements.

Key obligations

• Commercial insurers must prepare financial statements in accordance with Section 17A of the Insurance Act using IFRS, recognised GAAP, or other GAAP approved by the Authority, audited by an approved auditor.
• Commercial insurers must file a statutory balance sheet, statutory income statement and statutory statement of capital and surplus on an unconsolidated basis (unconsolidated SFS) in the format prescribed by the Insurance Account Rules.
• Consolidated GAAP financial statements, subject to prudential filters, must be used as the basis for preparing the Economic Balance Sheet (EBS) and calculating the Enhanced Capital Requirement (ECR).
• Class 3A, Class C and Class D insurers choosing to use condensed consolidated GAAP financial statements must ensure these are audited by the insurer's approved auditor and follow the format in Schedule VIII and IX of the Insurance Account Rules.
• Classes 3A, 3B and 4 insurers must maintain loss and loss expense provisions for general business not less than net insurance reserves calculated using audited consolidated GAAP financial statement values.
• Insurers seeking to use transitional arrangements for long term technical provisions must apply to the Authority and document the business subject to the transition adjustment, including any allocation methodology for the Risk Margin.

Applies to

commercial insurers, insurance groups, Bermuda Groups, Class 3A insurers, Class 3B insurers, Class 4 insurers, Class C insurers, Class D insurers, Class E insurers, limited purpose insurers

Deadlines

• 31st December 2015: Transitional arrangements for long term technical provisions apply only to business written on or before this date, valued using the Standard approach.
• year end 31st December 2031: Full EBS approach to technical provisions applies at this year end, being the end of the 16 year phase in period under the transitional arrangements.