Notice - Eligible Capital Rules 2011 (2011-11-14)

Summary

This notice from the Bermuda Monetary Authority announces the finalised Eligible Capital Rules 2011, made under section 6A of the Insurance Act 1978, which take effect on 31 December 2011. The Rules define tiers of capital (Tier 1, Tier 2 and Tier 3, each split into basic and ancillary components) that insurers may count toward their available statutory capital and surplus when demonstrating compliance with their minimum margin of solvency and enhanced capital requirement (ECR).

• Scope: Applies to Class 3A, Class 3B, Class 4 and Class E insurers, which must maintain available statutory capital and surplus at or above their minimum margin of solvency and their ECR using specified proportions of Tier 1, Tier 2 and Tier 3 capital.
• Capital tiering criteria: Sets detailed qualifying criteria for each capital tier, including subordination, loss absorption, maturity, redemption, coupon deferral and encumbrance conditions that capital instruments must meet to be admitted.
• Change from consultation draft: Following 2011 BSCR trial runs, the Authority added unearned premiums to the Tier 1 capital deduction for encumbered assets held for policyholder obligations, so the deduction equals encumbered assets in excess of the aggregate of unearned premiums, gross reserves and other insurance reserves.
• Deduction limitation: Clarifies that the encumbered-assets deduction from Tier 1 capital applies only where there are unsecured policyholders.
• Pending review: The Rules remain subject to final legislative review by the Attorney General's Chambers under the Statutory Instruments Act 1977, though further amendments are not anticipated.

The notice is primarily informational, announcing the finalised Rules and explaining the changes made after market trial runs, but the attached Rules themselves impose ongoing capital composition requirements on affected insurers from the effective date.

Key obligations

• Every Class 3A, Class 3B, Class 4 and Class E insurer must maintain available statutory capital and surplus equal to or exceeding its minimum margin of solvency, comprising at least 80% Tier 1 capital and no more than 25% of that Tier 1 amount in Tier 2 capital.
• Every Class 3A, Class 3B, Class 4 and Class E insurer must maintain available statutory capital and surplus equal to or exceeding its ECR, using the tier proportions specified for its class (e.g. Class 3B/4: at least 60% Tier 1, Tier 2 capped at 66.67% of Tier 1, Tier 3 capped at 17.65% of combined Tier 1 and Tier 2 subject to conditions; Class 3A/E: at least 50% Tier 1, with corresponding Tier 2 and Tier 3 caps).
• Capital instruments claimed as Tier 1, Tier 2 or Tier 3 capital must satisfy the specific qualifying conditions set out in the Rules (subordination, loss absorption, maturity, redemption restrictions, coupon deferral, unencumbered status, and exclusion from other tiers).

Applies to

Class 3A insurers, Class 3B insurers, Class 4 insurers, Class E insurers, Composite insurers

Deadlines

• 31 December 2011: Effective date on which the Eligible Capital Rules 2011 come into force.