Notice - Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Amendment Rules 2011 (2011-11-14)

Summary

This BMA notice explains and attaches the Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Amendment Rules 2011, which amend the 2008 Prudential Standards Rules governing the Bermuda Solvency Capital Requirement (BSCR) and related solvency reporting for Class 4 and Class 3B registered insurers. The amendments follow a 2011 market consultation and take effect on 31 December 2011.

• New definitions: Adds definitions of double or multiple gearing, interest rate/liquidity risk, and material intra-group transaction (thresholds of 5% or 10% of available capital and surplus, or high qualitative risk).
• Internal model revocation: Allows the Authority to revoke approval of an insurer's internal capital model for determining the Enhanced Capital Requirement (ECR) if it is no longer appropriate, e.g. due to substantial business change.
• New quarterly financial return: Requires insurers that are not part of a group for which the Authority is the group supervisor to file quarterly unaudited financial statements and intra-group transaction/exposure data by the last day of May, August and November each year.
• Interest rate shock increased: Raises the interest rate shock factor in Schedule I (Table 3, interest rate adjustment for bonds) from 120 basis points (1.2%) to 200 basis points (2.0%).
• Expanded Schedule V disclosures: Adds additional governance and group-structure disclosures, intra-group exposure and risk concentration details, and a requirement to retain supporting documentation for probable maximum loss and average annual loss calculations for at least five years.
• Schedule VII (CISSA) changes: Revises the CISSA Capital Summary table to deduct operational risk capital separately, adds a regulatory capital option for the CISSA amount, and requires insurers to answer additional questions on methodology and capital contingency plans.
• Schedule X replaced: Substitutes a new Schedule of Eligible Capital (Table 9 and 9A) setting out Tier 1, Tier 2 and Tier 3 eligible capital particulars in line with the Eligible Capital Rules 2011.

The notice states the Rules were still subject to final legislative review by the Attorney General's Chambers at the time of publication, though no further substantive changes were anticipated.

Key obligations

• Insurers that are not members of a group for which the Authority is the group supervisor must prepare and file quarterly financial returns on or before the last day of May, August and November of every year.
• Quarterly financial returns must include quarterly unaudited financial statements (balance sheet and income statement, no more than two months out of date), a list and details of material intra-group transactions, details of intra-group reinsurance/retrocession arrangements, and the ten largest counterparty exposures (or any exceeding 10% of statutory capital and surplus).
• Insurers must retain supporting documentation used to derive gross probable maximum loss, net probable maximum loss and average annual loss for at least five years after filing the related capital and solvency return, and produce it to the Authority on request.
• Insurers must provide expanded governance, group structure, intra-group exposure and risk concentration disclosures under Schedule V, including a copy of the latest group organizational chart and details of jurisdictions where board/executive functions reside.
• Insurers must complete additional CISSA-related questions in Schedule VII regarding the primary reasons for the disclosed CISSA amount, aggregation methodology, contingency capital plans, and any double/multiple gearing arrangements.
• Insurers must calculate the Bermuda Solvency Capital Requirement using the revised interest rate shock of 200 basis points (2.0%) instead of 120 basis points.
• Insurers must report eligible capital particulars using the replaced Schedule X (Tables 9 and 9A) in accordance with the Eligible Capital Rules 2011.

Applies to

Class 4 registered insurers, Class 3B registered insurers

Deadlines

• December 31st 2011: Effective/commencement date of the Amendment Rules 2011.
• last day of May, August and November every year: Deadline for insurers not part of a group supervised by the Authority to file quarterly financial returns.
• at least five years after a capital and solvency return has been filed: Retention period for supporting documentation used to derive probable maximum loss and average annual loss figures.