The Bermuda Monetary Authority (BMA) has published its 2008/9 Business Plan (click here to view the Plan). The Business Plan sets out the BMA's goal to become internationally recognised as a leading risk-based financial regulator.
The Business Plan outlines the BMA's proposed move from a fixed minimum solvency margin (MSM) to a flexible risk-based capital model (Bermuda Solvency Capital Requirement or BSCR), which reflects moves made in the UK (with the introduction of Individual Capital Assessments in 2004) and the European Solvency II proposals.
Under the old rules, the MSM has been calibrated based on the scale and class of any insurer's business with higher premium and/or reserving levels requiring more statutory capital and surplus. No account is taken of the fact that certain lines or classes of business are inherently riskier than others. In line with a risk-based approach, the BSCR will take into account the risk of different lines of insurance, as well as a broad range of other risk factors including credit risk, equity risk, liquidity risk, reserving risk and catastrophe risk. The BSCR is expected to be calibrated at a 99% one-year tail value at risk measure (ie identifying the potential shortfall should events occur beyond that defined threshold). Because the BSCR will be a static factor based model reflecting the 'average' risk of a Class 4 insurer, insurers will be allowed to use their own internal capital models where they can establish that they better reflect their own risk characteristics.
Class 4 insurers have already been required to run the BSCR for their 2007 year end and submit the result to the BMA for review. The BMA expects to introduce legislation in the second quarter of 2008 to apply the BSCR to Class 4 insurers for the 2008 year end, extending it to a sub-set of commercial Class 3 insurers for year end 2009. The BSCR will be supplemented with enhanced reporting requirements, including forward looking risk management information, catastrophe exposure per territory and stress and scenario testing results.