Update on adjustments to the Bermuda Solvency Capital Requirement
On 31 July 2018, the Bermuda Monetary Authority published revised Bermuda Solvency Capital Requirement (BSCR) models and rules for commercial insurers.
The amendments represent the culmination of nearly two years of consultation on and field-testing of proposed adjustments designed to bring the BSCR more closely into line with international standards.
Most recently, in March 2018, the BMA consulted on the following calibration of adjustments that it had previously consulted on in the areas of equity risk, premium risk, credit risk, other insurance risk for long-term business, dependencies with premium and reserve risks, the overall risk aggregation process, operational risk, other BSCR adjustments and BSCR charges for run-off insurers:
- Changes to allow consideration of the risk mitigating effect of a variety of risk mitigating techniques in an explicit manner. This is coupled with detailed prescriptions that eligible risk mitigation techniques will need to meet, to be set out in guidance from the BMA.
- Recognising a credit risk in future premium receivables (which has not previously been measured as such receivables are recorded on the liability side of the insurer’s economic balance sheet), calibrating (reducing) the charge for receivables on securities sold and introducing an alternative measure of reinsurance receivable credit risk based on ceded premiums rather than expected balances receivable. The latter creates a new charge for new insurers which have not yet incurred any losses and who reinsure a substantial volume of business and which, under the current system, do not have a reinsurance credit risk charge.
- Adjustments to operational risk charges which will increase the capital charge for insurers with higher operational risk scores and reduce the charge for insurers who currently have an adjusted factor of 4% or lower.
- Revised equity risk charges based on an instantaneous shock applied to balance sheet exposure, both relevant assets and liabilities, triggering the revaluation of the balance sheet exposure under the shock.
- Replacement of net premium written as the basis for calculating charges for premium risk with a formula based on “base exposure” plus multi-year charges. Base exposure is the maximum of estimated net premiums earned in the next 12 months and net premium written at year-end. Calibrated charges for multi-year contracts, providing for a reducing charge for the second and later years of a multi-year contract. The foregoing has the advantage, over the existing methodology, of taking into account bound but not incepted business and of avoiding underestimates of the risk of multi-year contracts.
- The introduction of the loss absorbing capacity of deferred taxes, now a matter of considerably more importance to many Bermuda insurers that have elected to be US tax payers, subject to a limit on the maximum credit allowed from a tax adjustment to the cap set for operational risk (20%).
- The withdrawal of exemptions granted to a significant number of runoff insurers from the annual calculation of enhanced capital requirement (ECR) using the BSCR standard formula and applying standard BSCR factors for all risks. The BMA will consider applications for a BSCR modification where a runoff insurer accepts a portfolio transfer, to avoid double counting of premium and reserve risks. The BMA has also signalled greater attention to adverse development risks inherent in certain long-tail classes.
- Further adjustments relating to dependency risk, currency risk, interest rate and liquidity risk, management actions and derivatives.
The rules and models implement the adjustments that were consulted on in March 2018.
The revised models and rules will come into force on 1 January 2019, subject to 3- and 10-year grade-in provisions for general and long-term insurers, respectively, or an intermediate period for dual license insurers reflecting the proportion of long-term and general business of the dual license insurer.