Instructions on Asset and Scenario Based Approach-related Approvals (2024-10-10)

Summary

This is a Bermuda Monetary Authority guidance bulletin explaining the process, information requirements and fees for obtaining approval to use certain asset classes under the Scenario Based Approach (SBA) Rules. It applies to long-term insurers and insurance groups that use the SBA and wish to hold or use specific categories of assets in their SBA and surplus asset portfolios.

• Assets requiring approval: Non-publicly traded assets, below investment grade assets, residential mortgages, commercial mortgages, structured assets, alternative assets, long-term investment credit (LTIC) assets, and affiliated assets all require prior BMA approval before use.
• Default and downgrade costs: Default and downgrade costs for the above assets, subject to a BMA-prescribed floor, also require approval and must be submitted together with the related asset application.
• Application content: For all assets, registrants must submit a supporting memo (identifying the assets, related approvals needed, and the qualitative/quantitative basis for the request) plus a completed Lapse, Liquidity and Scenario Based Approach (LLSBA) Return; incomplete applications (missing critical data) will not be reviewed.
• Asset-specific requirements: Commercial and residential mortgage loan applications must populate specified critical fields (e.g. LTV, DSCR for CMLs; LTV, mortgage type, amortisation, documentation and credit score for RMLs) and explicitly split assets into investment grade versus below investment grade categories with criteria explained.
• Structured assets: Applications for structured assets require a detailed memo covering market conditions and spreads, investment policy and risk appetite, asset listing and portfolio context, stress testing (including BEL/BSCR impact of downgrade risk), and attestations on payment priority, bankruptcy risk, securitisation compliance and audit work.
• Fees: An aggregate fee of $20,000 applies where investment grade non-publicly traded assets, mortgage loans and structured assets are treated as one application; affiliated assets are subject to a separate $20,000 fee; other fees (below investment grade, LTIC, default and downgrade costs) are set out in the BMA Fee Notice.

Applications should demonstrate that they have passed through the insurer's governance and risk control functions, and multiple asset types can be combined into a single application using a BMA-provided template that clearly identifies each asset's application category.

Key obligations

• Registrants must obtain BMA approval before using non-publicly traded assets, below investment grade assets, residential or commercial mortgages, structured assets, alternative assets, LTIC assets or affiliated assets in the SBA.
• Registrants must submit a supporting memo and a completed LLSBA return with every asset approval application.
• Applications for default and downgrade costs must be submitted alongside the related asset application; applications lacking this will be treated as incomplete and not processed.
• Commercial and residential mortgage loan applications must populate all critical risk assessment fields (e.g. LTV, DSCR, credit score) and explicitly classify mortgages as investment grade or below investment grade with stated criteria.
• Structured asset applications must include a memo covering market conditions, investment policy, asset listing, stress testing, and attestations on priority of payment, bankruptcy risk, securitisation compliance and audit work.
• Registrants must pay the applicable fee (e.g. an aggregate $20,000 fee for combined investment grade non-publicly traded assets, mortgage loans and structured assets, or $20,000 for affiliated assets) per the BMA Fee Notice.
• Applications must demonstrate review and assessment by the insurer's governance system and relevant control functions before submission.

Applies to

long-term insurers, insurance groups, registrants using the Scenario Based Approach (SBA)