Bermuda is shortly to introduce new risk-based capital standards for insurance companies. The purpose of the Bermuda Solvency Capital Requirement ("BSCR") is to allow the Bermuda Monetary Authority ("BMA") to analyse the impact and probability of failures among regulated insurers. The BSCR is being implemented in phases, first among the Class 4 insurers, and subsequently among certain commercial Class 3 insurers.
Generally, the Insurance Act 1978 and its Regulations require insurers and reinsurers to meet a margin of solvency, as well as minimum amounts of paid-up capital for registration. This is the Regulatory Capital Requirement ("RCR").
The RCR is calibrated based upon the scale of an insurer's business, with higher premium and/or reserving levels requiring more statutory capital and surplus. No account is taken by the RCR of the fact that certain lines or classes of business are inherently riskier than others.
The change from prior regulation is therefore to establish a risk-based capital model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalisation. Thus, insurers using the BSCR or an approved in-house model must also provide the BMA a more detailed annual Statutory Financial Return.
The BSCR employs a standard mathematical model that can relate more accurately the risks taken on by insurers to the capital that is dedicated to their business. The particular framework that has been developed seeks to apply a standard measurement format to the risk associated with an insurer's assets, liabilities and premiums, including a formula to take account of catastrophe risk exposure.
However, where the insurer believes that its own internal model better reflects the inherent risk of its business, it may make application to the BMA for approval of its internal model to be considered in the determination of its RCR as opposed to BSCR.
The BMA may approve an internal model provided certain conditions have been established. The BMA also reserves the right to revoke approval in the event that the conditions are no longer being met or where it feels that the revocation is appropriate. The BMA will review the internal model regularly to confirm that the model continues to meet the conditions.
Conversely, while the product of the risk-based capital test is mechanistic, the BMA has stated in its consultation paper that it believes it necessary to provide some limited degree of discretion for it to impose additional capital requirements on insurers in particular cases.
In those cases, the new risk-based capital model should be supplemented by a requirement for the affected insurers to conduct certain stress and scenario testing in order to assess their potential vulnerability to defined extreme events. Where the results of scenario and stress testing indicated potential capital vulnerability, the BMA would be able to require a higher solvency 'cushion' by increasing the RCR for that insurer.
The Bermuda insurance market is already extremely well capitalised and the BMA has for many years monitored, managed and mitigated the risks that are taken on by Bermuda insurers and ensured that adequate capital is held against them. As a result, the incidence of problem situations in the Bermuda market has been low, with policyholder losses extremely rare. The overwhelming majority of registered insurers already operate at capital levels that are well in excess of the legal minima.
Accordingly, for the most part, in developing and introducing the new risk-based solvency tests, the BMA has stated it sees no need to alter the overall relationship between aggregate capital held and risks underwritten in the Bermuda market.
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