BERMUDA MONETARY AUTHORITY COMMERCIAL INSURER S SOLVENCY SELF ASSESSMENT (CISSA) 2011 INSTRUCTION HANDBOOK
TABLE OF CONTENTS 1. Intrductin... 1 2. Overview... 2 Changes t the CISSA... 2 Submissins f Mdel Data... 2 Wrk papers and Supprting Dcuments... 2 Cntact Persn fr Questins... 2 3. CISSA Capital Summary (Table 8)... 3 4. CISSA General Questins (Table 8A)... 6 5. CISSA Assessment f Material Risks f the Insurer (Table 8B)... 8
1 INTRODUCTION 1. The Cmmercial Insurer s Slvency Self Assessment (CISSA) is a regime that requires cmmercial insurers 1 t perfrm an assessment f their wn risk and slvency requirements. The CISSA prvides the Bermuda Mnetary Authrity (the Authrity) with the insurer s perspective f the capital resurces necessary t achieve its business strategies and remain slvent given its risk prfile, as well as insight int the risk management and gvernance prcedures surrunding this prcess. 2. The CISSA requires an insurer t determine the capital resurces required t achieve its strategic gals, after it has assessed all reasnably freseeable material risks arising frm its peratins r peratinal envirnment; referred t as the CISSA capital. The CISSA capital charges are cmpared t the regulatry capital 2 charges fr the respective risks. The insurer shall prvide an explanatin f the primary reasns fr material deviatins between the CISSA capital charges and the regulatry capital charges fr a given risk, if the deviatin is greater than 15%. 3. The CISSA is ne f the tls used in the supervisry review prcess t assist in mnitring cmpliance with the Insurance Cde f Cnduct ( Cde ), given that the CISSA shuld, at a minimum, cnsider thse risks utlined in the Cde. Purpse 4. These instructins are applicable t Class 4 and Class 3B insurers. This dcument cntains CISSA return instructins fr use by persns respnsible fr the CISSA prcess and fr submitting the cmpleted CISSA return t the Authrity. 5. The instructins will assist with the cmpletin f the CISSA return. The CISSA prcess shuld be integrated int the insurer s decisin-making prcess and serve a critical rle in the develpment, implementatin and mnitring f management strategies. This is referred t as the use test. The Authrity envisins that many insurers already have in place systems and prcesses that, t a great extent, will meet the requirements f the CISSA. Therefre, the instructins include high-level guidance that allws fr flexibility t ensure that the CISSA reflects individual circumstances f an insurer. 1 In this instructins handbk, the term insurer als includes reinsurer and insurance includes reinsurance. 2 Regulatry capital is determined by an apprved internal mdel r the Bermuda Slvency Capital Requirement ("BSCR") as described in the Insurance Prudential Standards (Class 4 Slvency Requirement) Order 2008 at 99.0% Tail Value-at-Risk ( TVaR ) ver a ne year time hrizn. 1
2 OVERVIEW 6. These instructins cntain the fllwing sectins: CISSA capital summary (Table 8) CISSA general questins (Table 8A) Assessment f material risks f the insurer (Table 8B) Changes t the CISSA 7. Peridically, changes t the CISSA may be necessary t keep pace with internatinal regulatry develpments within the IAIS 3. The Authrity will cmmunicate such changes t insurers in a timely manner t allw adequate time fr insurers t cllect any additinal infrmatin required. Submissins f Mdel Data 8. The insurer shuld submit a printed reprt (hard cpy) and an electrnic wrksheet f the CISSA by the due date specified by the Authrity. Electrnic data shuld be submitted using the wrksheet template prvided t insurers. There may be instances where the screen display and printut f certain parts f the mdel may differ frm the frmat shwn within this reprt. If instances arise where the actual cntent and/r calculatins f the wrksheet template differ frm what is shwn in this reprt, insurers shuld cntact the Authrity directly fr clarificatin and guidance. Insurers shuld nt alter r mdify the wrksheet template in any way. Wrk papers and Supprting Dcuments 9. Wrk papers and dcuments used t prepare the CISSA submissin shuld be retained and kept available fr examinatin and discussin with the Authrity, shuld the need arise. Cntact Persn fr Questins 10. Questins regarding the cntent r meaning f any f the items in this reprt shuld be addressed t riskanalytics@bma.bm r directed t the Deputy Directr f Risk Analytics Department, Mr. Graham Strng at 441-278-0246 r gstrng@bma.bm. 3 Internatinal Assciatin f Insurance Supervisrs ( IAIS ) 2
3 CISSA CAPITAL SUMMARY (TABLE 8) 11. Backgrund The CISSA capital summary disclses the insurer s wn capital cmputatins, a cmparisn f the CISSA capital and regulatry capital, the insurer s plans fr raising additinal capital and cntingency arrangements impacting the available capital. T cmpute the CISSA capital, insurers shuld generally apply a methdlgy that is suitable t the nature and scale f their peratins. Where an insurer uses an internal mdel/tl t determine its CISSA capital, the internal mdel/tl will nt require the Authrity s apprval fr that purpse. 12. Items a) CISSA Capital Summary Line Clumn 1 CISSA capital (clumn) 2 Regulatry capital (clumn) Descriptin Input the CISSA capital determined by the insurer fr the respective risk categry. The Authrity is mindful that it is difficult t quantify and therefre hld capital in respect f certain risks e.g. liquidity, reputatinal, cncentratin, grup and strategic risk. Where an insurer des nt hld capital against certain risks, it shuld input a nil amunt in the respective cell. Input the regulatry capital as determined by the BSCR r an apprved internal capital mdel at 99.0% TVaR ver a ne year time hrizn. Line Rw 1 Ttal capital prediversificatin between risk categries (rw) 2 Ttal capital after diversificatin between risk categries (rw) Descriptin Ttal capital pre-diversificatin between risk categries is derived by aggregating all the risk categries. Ttal capital after diversificatin between risk categries shall be derived by deducting the diversificatin benefit (calculated by an insurer) frm the Ttal capital pre-diversificatin between risk categries b) Additinal infrmatin This sectin cntains questins which require a respnse frm the drp-dwn menu prvided and/r an explanatin. 3
Line Item Descriptin 1 Questins 1 t 5 The insurer shuld select the apprpriate respnse and/r therwise prvide a brief descriptin r an attachment. Where an attachment is prvided, the insurer shall include references (e.g. page number, paragraph number) f where the infrmatin can be lcated within the attachment. 13. Screen shts n capital summary sheet Risk Categries (a) CISSA capital (b) Regulatry capital Catastrphe risk Reserve risk Premium risk Market risk Credit risk Liquidity risk Operatinal risk Grup, Cncentratin, Reputatinal and Strategic risk Other (specify) Ttal capital pre-diversificatin between risk categries Diversificatin credit between risk categries Ttal capital after diversificatin between risk categries 13. Screen shts n capital summary sheet, cnt d ADDITIONAL INFORMATION 1. What is the primary reasn(s) (select multiple respnses where applicable) fr aiming at the disclsed CISSA capital amunt? (select all that apply): target agency rating (e.g. "A-", "AA", etc); 4
market share; business expansin; nature f prduct(s) (e.g. risk characteristics); manage dwngrade risk; and thers. 2. What methdlgy is used t aggregate the risk categries in deriving the CISSA capital? 3. What cntingency plans are in place fr raising additinal capital under stress situatins? (select all that apply): parental guarantees; revlving letters f credit; issue subrdinated debt; issue preference shares; flat additinal shares; capital injectins frm parent; cntingent surplus ntes; catastrphe derivatives (e.g. bnds, swaps and ptins); and thers. 4. Des the insurer have arrangements/ cntractual cmmitments t prvide supprt t affiliates/ther cmpanies in stressed situatins? (Yes r N) If yes, briefly describe the arrangement(s) and the aggregate expsure. 5. Has the insurer dwn streamed debt t establish equity psitins (participatins) r, engaged in duble r multiple gearing? (Yes r N) If yes, prvide details and amunt f capital. 5
4 CISSA GENERAL QUESTIONS (TABLE 8A) 14. Backgrund CISSA general questins prvide infrmatin abut insurer s risk management and gvernance prgramme, the review and apprval f the CISSA and integratin f the CISSA int the strategic decisin-making prcess. 15. Items This sectin cntains questins which require a respnse frm the drp dwn menu and/r an explanatin. Line Item Descriptin 1 Questins 1 t 5 The Insurer shuld select the apprpriate respnse and/r therwise prvide a brief descriptin r an attachment. Where an attachment is prvided, the insurer shall include references (e.g. page number, paragraph number) f where the infrmatin can be lcated within the attachment. 2. Questin 5 Independent verificatin Independent verificatin shall be cnducted by an internal r external auditr r any ther apprpriately skilled internal r external functin; as lng as they have nt been respnsible fr the part f the CISSA prcess they review, and are therefre deemed t be independent in their assessment. 6
16. CISSA general questins screen shts 1. Is the CISSA and its underlying infrmatin integrated (i.e. cnsidered when making key strategic decisins) int the insurer's strategic and risk management decisin-making prcesses? (Yes r N) If yes, hw is CISSA and its underlying infrmatin used? (select all that apply) strategic planning; annual business planning; setting risk limits; defining risk appetite; evaluatin f capital adequacy; allcatin f capital t business segments and lines f business; capital management; determinatin f rates f return fr pricing and underwriting guidelines; reinsurance purchase; determinatin f investment plicies and strategies; meeting regulatry requirements; imprving credit rating; imprving investr relatins; assessing risk adjusted prduct prfitability; perfrmance measurement and assessment; imprving mergers and acquisitin decisins; and thers (list). 2. Has the insurer applied reverse stress testing t bth identify the scenaris that culd cause business failure and the required actins t manage such situatins? (Yes r N) 3. Is the CISSA prcess clearly dcumented and regularly amended fr changes in strategic directin, risk management framewrk, and market develpments? (Yes r N) 4. Hw ften is the infrmatin underlying CISSA discussed and reviewed by the bard and chief and senir executives? 5. Have the bard and chief and senir executives ensured that an apprpriate versight prcess is in place, including an apprpriate level f independent verificatin, whereby material deficiencies are reprted n a timely basis and suitable actins taken? (Yes r N) Optinally the insurer may prvide brief cmments. 7
5 CISSA ASSESSMENT OF MATERIAL RISKS OF THE INSURER (TABLE 8B) 17. Backgrund This sectin prvides infrmatin n an insurer s slvency self assessment f its material risks and the determinatin f the quality and quantity f capital required t cver these risks. It als prvides infrmatin n the gvernance and cntrls surrunding mdel(s)/tl(s) used t cmpute the CISSA capital. 18. Items This sectin requires insurers t undertake and file with the Authrity an assessment f the insurer s material risks and the determinatin f bth the quality (types f capital) and quantity f CISSA capital required t cver these risks, while remaining slvent and achieving the insurer s business gals. a) Questin 1 t 11 Line Item Descriptin 1 Questins 1 t 11 Insurers shall prvide attachments cntaining the infrmatin requested. The attachments shuld include references (e.g. page number, paragraph number) f where the infrmatin can be lcated within the attachment. b) Questin 12 - gvernance and cntrls surrunding mdel(s)/tl(s) used t calculate the CISSA capital This sectin cntains questins that require a respnse frm the drp dwn menu prvided and/r an explanatin t be prvided. Line Item Descriptin 1 Questin 12 The insurer shuld select the apprpriate respnse r therwise prvide a brief descriptin r an attachment. Where an attachment is prvided, the insurer shall include references (e.g. page number, paragraph number) f where the infrmatin can be lcated within the attachment. 8
19. CISSA Assessment f material risks f the insurer screen shts The insurer shall undertake and file with the Authrity the insurer s mst recent reprt (insurer specific reprt) cmprising a slvency self assessment f its material risks and the determinatin f bth the quality (types f capital) and quantity f CISSA capital required t cver these risks, while remaining slvent and achieving the insurer s business gals. Minimally the self assessment and the insurer specific reprt shuld include: 1. Date the assessment was cmpleted and the insurer specific reprt last updated. 2. The identificatin and assessment f all reasnably freseeable material risks, including thse specified in the Insurance Cde f Cnduct (i.e. insurance underwriting risk; investment, liquidity, and cncentratin risk; market risk; credit risk; peratinal risk; grup risk; strategic risk; reputatinal risk; and legal risk). 3. The identificatin f the relatinships f the material risks with ne anther, and the quantity and type f capital required t cver the risks. 4. A descriptin f the insurer s risk appetite, including limits impsed and hw they are enfrced. 5. Assumptins and methdlgy used t assess and aggregate risks. 6. A frward lking analysis f the risks faced by the insurer ver its planning hrizn and an analysis demnstrating the ability t manage its business and capital needs in adverse circumstances and still meet regulatry capital requirements. 7. An evaluatin f whether the insurer has sufficient capital and liquidity available t achieve its strategic gals ver its planning hrizn and any ptential adverse cnsequences if insufficient. 8. A descriptin f business cntinuity and disaster plans. 9. A descriptin f hw the results f the self assessment are integrated int the management and strategic decisin making prcess. 10. Apprval and signed declaratin f the CISSA assessment by tw members f the bard f directrs. 11. Fr each material risk identified the submissin shuld minimally include: a) Identificatin f the risk wner, qualificatins and respnsibilities. b) The risk drivers (e.g. fr catastrphe risk the drivers culd be US earthquake, Eurpean windstrm, terrrism etc). c) The primary mdel(s)/tl(s) used t calculate the CISSA capital fr the risk, where applicable. d) The primary surces f data used as inputs t the mdel(s)/tl(s). e) The key assumptins used in the assessment f the risk. f) A descriptin and quantitative impact f stress and scenari testing (if any) n capital including key assumptins. g) A descriptin f measures taken t transfer r therwise mitigate the risk. h) Quantificatin f the risk if the insurer is hlding capital against it bth pre and pst diversificatin. i) An explanatin f the primary reasns fr any material deviatins between the CISSA capital as it pertains t the risk (if hlding capital against the risk) and the regulatry capital charge fr the risk, if the deviatin is greater than 15%. 9
19. Gvernance and cntrls surrunding mdel(s)/tl(s) used t calculate the CISSA capital screen shts 12. Mdel(s)/tl(s) used t calculate the CISSA capital Gvernance a) Des the bard f directrs, chief and senir executives apprve the design, maintenance and use f the mdel(s)/tl(s)? b) Hw ften des the bard r relevant bard cmmittees review utputs, changes and issues arising frm the mdel(s)/tl(s) (review shuld be dcumented e.g. minutes, presentatins etc)? c) Des the bard and chief and senir executives have a general understanding f the key assumptins/elements and the implicatins f the utputs (including limitatins) f the mdel(s)/tl(s)? Validatin d) Is the mdel(s)/tl(s) subject t a regular cycle f validatin; which includes the mnitring f perfrmance, review f apprpriateness f mdel specificatins and testing f frecast results against actual results? e) Hw ften is the validatin f the mdel(s)/tl(s) perfrmed? f) Des the validatin prcess demnstrate that the mdel(s)/tl(s) remain suitable during changing cnditins (e.g. changes in inflatin, interest rate, etc)? If n, prvide cmments. Dcumentatin g) Des the insurer have frmal dcumentatin f the structure, design, peratinal details, input assumptins, parameters, gvernance prcess and cntrls f the mdel(s)/tl(s)? h) If yes, t what extent is the mdel(s)/tl(s) dcumented such that it can be used by new persnnel with limited user experience? (include cmments fr partial r n dcumentatins) i) Hw ften des the bard f directrs r chief and senir executives review and apprve the mdel/input dcumentatin? Internal cntrls j) Hw des the insurer rate the effectiveness f the cntrls in place t mnitr and evaluate the peratin and maintenance f the mdel(s)/tl(s)? k) Are there strict prtcls in place restricting access t the mdel(s)/tl(s) and ability t make adjustments theret? Others I) What is the risk measure (VaR, TVaR etc), cnfidence interval (95%, 99.95% etc) and time hrizn (1 year, 3 years etc) used t derive the CISSA capital? 10