The Bermuda Monetary Authority (BMA) has recently published instructions for a significant data collection exercise: the 2025 Global Financial Crisis (GFC) Stress Test. This initiative requires Bermuda-regulated commercial long-term (Class C, D, and E insurers) to assess their sensitivity and resilience to a severe economic crisis similar to the 2008 GFC. Submissions are required by mid-June 2025.
For insurers operating in Bermuda, understanding the scope, requirements, and implications of this stress test is crucial for ensuring compliance and effectively navigating the process.
Purpose and Scope of the Stress Test
The BMA's objective is to gather market-wide information on the sensitivity of Bermuda's commercial long-term reinsurers to a severe market event. This analysis will complement the regular stress tests already performed by these insurers as part of their annual filings. We must highlight that the BMA has stated that this exercise is not used to set regulatory capital requirements. The stress test is to be performed based on the reinsurers' balance sheet as at 31 December 2024, or the closest financial year end used for annual regulatory filings.
The stress test applies to all BMA regulated commercial long-term insurers – Classes C, D and E. Composite insurers must perform the test for both their long-term and general insurance books.
An insurer that has no in-force insurance treaties at the valuation date, or as otherwise agreed by the BMA, can be designated as an 'out-of-scope reinsurer'. Applications for this designation must have been made to the BMA by 1 June 2025. Even if designated out-of-scope, the BMA still expects these insurers to use best endeavors to submit a test, quantifying the impact of the stress on their financial strength and detailing appropriate management actions. The lack of reinsurance treaties should be noted in the submission template.
The Stress Scenario and its Impacts
The calibration of the stress test is based on the April 2023 Aggregation Method Data Collection exercise (IAIS Specification). The stress is a GFC-style event defined by combined individual stresses to interest rates, credit spreads, equities, real estate, and realised credit defaults. All these stresses are applied together and reported on a combined basis. Companies must report their stressed financial condition both before and after management actions.
The stress test requires calculating the impact on financial strength, including:
- Impacts on Available Capital: This involves
applying market risk and credit default risk stresses.
- Market Risk: Includes stresses to interest rates, credit spreads, equity, and real estate. For instance, Market Value of Assets (MVA) are stressed by defined parallel shocks by currency (e.g., a 1.47% decrease in interest rates for USD and a 2.98% spread increase for USD fixed income). Developed equity holdings face a 45% decrease, and real estate holdings a 25% decrease. Preferred shares and hybrid obligations are subject to the equity risk charge within the Insurance Capital Standards (ICS) specification, with a stress of 100% of the relevant hybrid/preference share stress factor from Table 19 of the ICS Technical Specification. The stresses for MVA calculation are assumed to be instantaneous with no opportunity for rebalancing. Scenario Based Approach (SBA) liabilities and Standard Approach (SA) liabilities must also be revalued reflecting these stresses and potentially adjusted risk-free curves. The Risk Margin is revalued based on the adjusted Bermuda Solvency Capital Requirements (BSCR) framework and risk-free rates.
- Credit Default Risk: The IAIS specification requires a credit default shock calibrated to 50% of the ICS credit risk capital factors, with no downgrade shock. These stresses are applied on a pre-diversification basis after market risk stresses. The preferred method involves calculating the appropriate ICS credit risk capital factor for each asset (mapping asset categories to ICS categories like corporate, securitisation, etc.) and applying 50% of that factor to the stressed MVA. Asset values are reduced by 50% of their applicable ICS credit risk capital factor. An alternative method is available for mortgages, using 50% of the BSCR capital factor, but firms must disclose this choice and justify the approximation.
- Impact on the BSCR: After applying the market risk and credit default risk stresses to the MVA and liabilities, companies must utilise the current BSCR charges and methodology applied to these revalued amounts to determine the impact on the BSCR.
Reporting Requirements and Template
Reinsurers must complete the stress test using a supplied submission template. The template includes:
- Sheet 1. ECR Impacts: Reports the balance sheet, required capital, and Enhanced Capital Requirement (ECR) on three bases: simplified reported results at the valuation date, GFC combined stress impact, and simplified results post-stress but before management actions. A detailed summary of asset classes, split by assets backing surplus, SBA, and SA, is required. Section C quantifies the impact of each management action and restates the balance sheet incorporating both stress and management actions.
- Sheet 2. Management Actions: Provides space to describe the top five management actions planned following the stress. Action 1 is specifically reserved for balance sheet rebalancing among assets backing SBA, SA, and Surplus liabilities, with no external trading permitted. Subsequent actions must be highly plausible, actionable (likely contractual), and limited to public assets within specific timeframes (immediate, within four weeks, within three months, within six months). Management actions should align with the cure period of any applicable recapture trigger.
- Sheet 3. Recapture: Requires listing up to 92 reinsurance treaties or groups of treaties. Key details to report include Treaty Identifier, Cedent Jurisdiction and Affiliation, how Assets are Held (e.g., Trust Account, Funds Withheld), Reserve Balance, the relevant ECR Trigger level, and the potential Recapture Impact (positive or negative impact to ECR if recaptured). The reinsurer's Cure Period to remediate their ECR to mitigate recapture risk must also be identified. Other relevant recapture triggers, such as liquidity or rating triggers, should be described. If a treaty is at risk of being recaptured (e.g., due to trigger breach or pro-cyclical risk), the impact should be identified.
- Sheet 4. Disclosure: A critical sheet for providing additional information. Required disclosures include the valuation date, reporting currency, confirmation if an out-of-scope reinsurer or if the alternative method for mortgages was used, and the names and positions of the two senior executives who reviewed and approved the submission. Optional disclosures can include details on approximations/deviations from the ICS Technical Specification, confirmation that management actions align with recapture cure periods, quantification of the solvency impact (positive or negative) of recapture where triggers may be breached, details of additional governance or stakeholder engagement, and clarification for any items reported under 'miscellaneous' lines in Sheet 1.
Governance and Submission Deadline
The BMA expects the submission to be reviewed by the company's risk function and signed off by the chief risk officer and another appropriately skilled senior executive (e.g., CEO, CFO, Chief Actuary). Companies are encouraged to engage their board, relevant board committees, or other key stakeholders with the results, and details of these engagements are welcomed in the Disclosure sheet.
Unless otherwise agreed, the completed stress data call using the supplied template must be submitted via email to the BMA by 16 June 2025. An extended deadline of 30 June 2025 may be granted for insurers who engage with the Authority ahead of the deadline with draft results and management actions.
Conclusion
The 2025 GFC Stress Test is designed to provide the Authority with insights into market resilience during a severe economic downturn which is vital data for ensuring the resilience of the Bermuda market. Insurers must meticulously follow the instructions for applying the combined stresses, calculating impacts on available capital and BSCR, and completing the comprehensive reporting template. Particular attention should be paid to the requirements for detailing management actions and identifying and assessing the impact of potential treaty recaptures, given the contractual implications. Adhering to the governance requirements, including senior executive sign-off, and meeting the submission deadline are important. Insurers should review the instructions carefully and engage with the BMA if clarification or an extension is needed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
