Stakeholder Letter – Consultation Paper – Updates to "Proposed Enhancements to the Regulatory Regime for Commercial Insurers" (2023-11-30)

Summary

This is a stakeholder letter from the Bermuda Monetary Authority summarising industry feedback on its second consultation paper (CP2) on proposed enhancements to the regulatory regime and fees for commercial insurers, and setting out the Authority's responses and final positions on each issue. It confirms that the Authority will largely proceed with the CP2 proposals, with some clarifications and transitional measures, and reminds insurers of expectations under the Prudent Person Principle and on affiliate-related asset approvals.

• Technical provisions: BMA will implement the group risk margin and Standard Approach (EUR discount curve) proposals as per CP2; simplifications in calculating the group risk margin remain permitted if insurers comply with relevant rules and guidance.
• Scenario Based Approach (SBA): No material changes to CP2's SBA proposals, including retention of the floor on default and downgrade costs for structured assets; the uncertainty margin will transition over five years for existing business only (not applicable to default costs), accompanied by enhanced board capital management oversight, CISSA/GSSA reporting expectations, and discretionary BMA power to impose dividend restrictions case by case.
• BSCR computation: Revised lapse and expense risk charges and the partial (not full) offset for mass lapse calculations will proceed as per CP2, with further BMA instructions to follow on application of stresses; the Credit and Surety Catastrophe Risk charge will retain both Solvency II and ICS based scenarios, but any change of approach after initial selection requires prior BMA approval.
• Prudent Person Principle (PPP): Insurers, particularly long-term insurers with high allocations to non-traditional or illiquid investments, are reminded that investment decisions must be made in policyholders' best interests and assessed objectively by the BMA against PPP requirements.
• Affiliate, related or connected party credit exposure: BMA will require prior regulatory approval for all assets funding long-term liabilities that carry counterparty credit exposure to an affiliate, related or connected party, including assets held in modified coinsurance accounts on ceding companies' balance sheets; insurers must demonstrate PPP compliance to obtain approval and must look through to underlying counterparties (not asset managers).

The letter also reports that roughly 60 trial-run submissions showed a material negative solvency impact for long-term insurers and a smaller impact for P&C insurers, with both segments expected to remain adequately capitalised; stakeholders may contact the Authority for further clarification.

Key obligations

• Insurers must ensure compliance with relevant rules and guidance when using simplifications to calculate the group risk margin.
• Insurers must obtain BMA prior approval before investing in assets (funding long-term liabilities) with counterparty credit exposure to an affiliate, related or connected party, including assets in modified coinsurance accounts on ceding companies' balance sheets.
• To obtain such approval, insurers must demonstrate that the investment decision complies with the Prudent Person Principle and is in the best interest of policyholders.
• Insurers must look through to underlying counterparties (not asset managers) when determining the nature of affiliated, related or connected party credit exposure.
• Once an approach (Solvency II or ICS based scenario) is selected for the Credit and Surety Catastrophe Risk charge, any change to that approach requires prior BMA approval.
• During the transition period for the uncertainty margin, companies are expected to implement enhanced assessments and reporting as part of their CISSA/GSSA, focused on remaining adequately capitalised post-transition.
• Insurers, particularly long-term insurers with high allocations to non-traditional or illiquid investments, must ensure ongoing compliance with the Prudent Person Principle and be prepared for BMA's independent assessment of that compliance.

Applies to

commercial insurers, long-term insurers, property and casualty (P&C) insurers, insurance groups

Deadlines

• five years: Transition period over which the uncertainty margin change will be phased in for existing long-term business (not applicable to default costs).