Stakeholder Letter - Economic Balance Sheet Framework Consultation Paper (2015-03-17)

Summary

This is a follow up stakeholder letter from the Bermuda Monetary Authority responding to industry feedback on its December 2014 Economic Balance Sheet (EBS) Framework consultation paper. It answers a representative selection of stakeholder questions on the EBS and risk margin methodology, and announces details of a voluntary trial run of the framework.

• Cost of capital method: The Authority intends to mandate the cost of capital method for calculating the risk margin at initial implementation, though it will consider alternative approaches proposed during the trial run if they produce broadly similar results.
• GAAP financial statements: General purpose financial statements under GAAP and/or IFRS will become the basis for statutory accounting under Section 15 of the Insurance Act for the entire commercial insurance market from the 2016 year end; Long Term companies not currently producing audited GAAP statements will need to start doing so.
• Class C and D entities: From 2016, Class C and D entities will also be expected to provide audited GAAP financial statements, which may be published by the BMA subject to section 56 exemptions.
• No prior year comparatives: The Authority will not require prior year comparative financial statements for the first EBS filing.
• Statutory audit replacement: The current statutory financial statement audit is intended to be replaced by the company's existing GAAP audit; no separate EBS audit opinion will be required.
• Discount curves: Insurers must generally use discount curves supplied by the Authority, except for currencies where the Authority does not supply a curve, in which case insurers may construct their own curves following similar principles.
• Trial run: A trial run specification and spreadsheet (including an updated BSCR spreadsheet with EBS Schedule XIV) was expected by 2 April 2015, with completed trial run submissions due by 29 May 2015; participation is strongly encouraged but management attestations and Loss Reserve/Actuarial Opinions are not required, and results may be submitted on a best efforts basis.
• BSCR changes: The trial run will also test proposed BSCR changes responding to EIOPA's equivalence assessment caveats, including new currency risk and asset concentration risk modules, changes to the cash at bank charge, and geographical diversification for P&C business, to be detailed in a separate forthcoming consultation paper.

The letter is primarily informational and forward looking, previewing guidance and requirements that will be finalised through the trial run and subsequent consultation, rather than imposing final binding rules itself.

Key obligations

• Insurers must begin preparing audited GAAP and/or IFRS general purpose financial statements to serve as the basis for statutory accounting for the 2016 year end.
• Class C and D entities must provide audited GAAP financial statements starting with the 2016 year end, which the BMA may publish subject to section 56 exemptions.
• Insurers wishing to use their own discount curves may only do so for currencies where the Authority does not supply a prescribed curve; otherwise they must use the Authority supplied curves.
• Insurers participating in the trial run must submit completed trial run materials by Friday 29th May 2015.

Applies to

insurers, Long Term insurers, Class C insurers, Class D insurers, (re)insurers, commercial insurance market participants

Deadlines

• Thursday 2nd April 2015: Authority expected to issue the trial run specification and spreadsheet for completion.
• Friday 29th May 2015: Deadline for completed trial run submissions.
• 2016 year end: GAAP and/or IFRS general purpose financial statements to become the basis for statutory accounting under Section 15 of the Insurance Act, and audited GAAP statements required for Class C and D entities.