Stakeholder Letter on BSCR Update Proposals November 2017 and March 2018 and Associated Trial-Run Exercises (2018-07-17)

Summary

This is a stakeholder letter from the Bermuda Monetary Authority summarising industry feedback on the November 2017 and March 2018 BSCR (Bermuda Solvency Capital Requirement) Update Proposals and the associated trial-run exercises, and setting out the final decisions on changes to the BSCR standard formula.

• Interest rate risk: The current duration based approach remains available; insurers may continue using it or move to the new shock based method, but cannot revert to duration based without prior supervisory approval once they switch.
• Equity risk: Minor changes to the definition of strategic holdings for the equity risk charge, aligning it with international accounting standards; grandfathering of equity charges extended to the concentration risk calculation.
• Operational risk: Clarification that the operational risk charge is applied after consideration of the risk mitigating effect of management actions (reducing liabilities for future bonuses or discretionary benefits).
• Non-rule guidance: Look-through, management actions, risk mitigation, several equity risk definitions, and aspects of the shock based approach for scenario based BEL insurers will be addressed via instructions or guidance in upcoming BSCR Handbooks rather than formal rules.

The final version of the new BSCR rules was published on 17 July 2018 and will enter into force on 1 January 2019, subject to grade-in provisions. The rules apply to all classes of insurer in the commercial regime, namely Class 3A, Class 3B, Class 4, Class C, Class D, Class E and Groups.

Key obligations

• Insurers in the commercial regime must comply with the updated BSCR standard formula rules once they enter into force on 1 January 2019, subject to applicable grade-in provisions.
• Insurers electing to move from the duration based to the shock based interest rate and liquidity risk method cannot revert to the duration based method without prior supervisory approval.
• Operational risk charge calculations must be applied after considering the risk mitigating effect of management actions on liabilities for future bonuses or other discretionary benefits.
• Equity risk charge calculations must apply the revised definition of strategic holdings and the extended grandfathering treatment for concentration risk.

Applies to

Class 3A insurers, Class 3B insurers, Class 4 insurers, Class C insurers, Class D insurers, Class E insurers, Groups

Deadlines

• 1st January 2019: New BSCR rules enter into force, applicable to commercial regime insurers, subject to grade-in provisions.