Stakeholder Letter on Findings of Trial-Run Proposed Changes to BSCR (2017-11-30)

Summary

This is a stakeholder letter from the Bermuda Monetary Authority (BMA) reporting the results of a 2017 trial-run exercise testing proposed changes to the Bermuda Solvency Capital Requirement (BSCR) standard formula. It summarizes industry participation, key findings, and the actions the Authority is taking in response, including issuing a further revised consultation paper on the same date as this letter.

• Participation: Over sixty trial-run submissions were received across different classes of insurers and business models, generally of good quality.
• Main findings: Proposed changes are unlikely to cause broad market solvency issues but will lower Enhanced Capital Requirement (ECR) ratios and could affect a small number of already thinly capitalized insurers; changes to dependencies, equity risk and operational risk were the main drivers of results.
• Revised consultation paper: The Authority issued a further revised BSCR consultation paper on 30 November 2017, covering equity risk, premium risk, credit risk, dependencies, risk aggregation, operational risk, run-off insurers, currency/interest rate/liquidity risk, risk mitigation, management actions, look-through, derivatives, and grade-in arrangements.
• Further field testing: The Authority intends to conduct two additional rounds of field testing on the revised proposals: one in fall 2017 using financial figures as of 31 December 2016, and another in spring 2018 using figures as of 31 December 2017.
• Key proposal changes: Revised correlation assumptions and operational risk charges; new premium risk charges for multi-year P&C contracts and sundry assets/liabilities; new alternative approach for interest rate and liquidity risk; new criteria for risk mitigation, management actions, look-through and derivatives treatment; extension of the grade-in period from three to ten years for Long Term insurers; grandfathering of equity risk capital charges for equities backing existing liabilities as of 31 December 2018 for Long Term business; and a one-year delay to the implementation date.
• Implementation date: The new BSCR rules are intended to enter into force on 1 January 2019, subject to grade-in provisions.

The letter is primarily informational, reporting outcomes and next steps rather than imposing new binding rules directly, but it signals upcoming field testing exercises and a firm target implementation date that insurers should plan for.

Key obligations

• Insurers may be expected to participate in the fall 2017 field testing round using financial figures as of 31 December 2016.
• Insurers may be expected to participate in the spring 2018 field testing round using financial figures as of 31 December 2017.
• Insurers, particularly Long Term insurers, should prepare for the revised BSCR standard formula requirements taking effect 1 January 2019, including the extended ten-year grade-in period and equity risk grandfathering provisions.

Applies to

insurers, Long Term insurers

Deadlines

• fall 2017: First round of additional field testing on revised BSCR proposals, using financial figures as of 31/12/2016.
• spring 2018: Second round of additional field testing on revised BSCR proposals, using financial figures as of 31/12/2017.
• 1 January 2019: Intended entry into force of the new BSCR rules, subject to grade-in provisions.
• 31/12/2018: Reference date for grandfathering of equity risk capital charges for equities backing existing insurance liabilities for Long Term business.