Revised Bermuda Solvency Capital Requirement rules now in force

The Bermuda Monetary Authority's revised Bermuda Solvency Capital Requirements (BSCR) models and rules for commercial insurers have now come into force to help ensure the regulatory regime is more effective and more in line with international standards.

A final version of the new rules was published on July 17, 2019, which came into force on January 1, 2019, applying to all classes of insurers in the so called "commercial regime", including Class 3A, Class 3B, Class 4, Class C, Class D, Class E and Groups.

The BSCR model calculates a risk-based capital measure by applying capital factors to capital and solvency return elements, including investments and other assets, operational risk, and long-term insurance risks, in order to establish an overall measure of capital and surplus for statutory solvency purposes.

BMA had long considered restructuring certain aspects of the BSCR standard formula, and has put forward a series of proposals since November 2016.  The aim is to ensure capital requirements are in line with best practice in terms of solvency regimes, and to ultimately better reflect how insurers manage risk.

Using both feedback from stakeholders on the proposed changes and the results from around 150 or more trial-run exercises across different classes of insurers and business models, the authority concluded that the BSCR Update Proposal published in March 2018 formed a sound basis for changing the formula.

Among the new changes, the BMA said the current duration-based approach for interest rate and liquidity risk will remain unchanged at this stage, suggesting it is a simple approach with well-known advantage and limitations. Insurers have the option of continuing the duration-based BSCR method or moved to the proposed shock-based method to evaluate balance sheet exposures.

The new rules also include minor changes to the definition of strategic holdings for the purposes of calculating the equity risk charge to make it more in line with international accounting standards.

Also included is the extension of grandfathering of equity charges to the concentration risk calculation.

Finally, additional clarification on the calculation of the operational risk charge has been provided, namely that it should be applied after consideration of the risk mitigation effect of management actions (by reducing liabilities for future bonuses or other discretionary benefits).