Insurance (Prudential Standards) (Class 4 Solvency Requirement) Amendment Order 2009
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INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
REQUIREMENT) AMENDMENT ORDER 2009
BR 79/2009
In exercise of the powers conferred upon the Bermuda Monetary
Authority by section 6A of the Insurance Act 1978, the following Order is
made:
Citation and commencement
1 This Order may be cited as the Insurance (Prudential Standards)
(Class 4 Solvency Requirement) Amendment Order 2009, and shall come
into operation on the 31st day of December 2009.
Interpretation
2 In this Order “principal Order” means the Insurance (Prudential
Standards) (Class 4 Solvency Requirement) Order 2008.
Paragraph 2 of principal Order amended
3 Paragraph 2 of the principal Order is amended by inserting the
following definitions in their alphabetical order—
“business continuity risk” includes a risk of an event that
threatens or disrupts an insurer‟s continuous operations;
“business processes risk” includes a risk of errors arising from
data entry, data processing, or application design;
“compliance risk” includes a risk of legal or regulatory breaches
or both;
“distribution channel risk” includes a risk of disruption to an
insurer‟s distribution channel arising from employment of
inexperienced or incapable brokers or agents.
“fraud risk” includes a risk of misappropriation of assets,
information theft, forgery or fraudulent claims;
“human resources („HR‟) risk” includes a risk of employment of
unethical staff, inexperienced or incapable staff, failure to
train or retain experienced staff, and failure to adequately
communicate with staff;
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
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“information technology („IT‟) risk” includes a risk of
unauthorized access to systems and data, data loss, utility
disruptions, software and hardware failures, and inability to
access information systems;
“outsourcing risk” includes a risk of mis-communication of
responsibilities in relation to outsourcing, breach of
outsource service agreements or entering into inappropriate
outsource service agreements.
Paragraph 6 of principal Order amended
4 Paragraph 6 of the principal Order is amended—
(a) by deleting subparagraph (2) and substituting the
following—
“(2) Every Class 4 insurer shall make a capital and
solvency return to the Authority in accordance with
Schedules I, II, III, IV, V and VI;”;
(b) by inserting the following subparagraph after paragraph
(2)—
“(2A) A capital and solvency return shall comprise
the following —
(a) both an electronic version and a printed
version of the BSCR model;
(b) printed versions of the returns prescribed
in Schedules II, III, IV, V and VI; and
(c) where applicable, a printed copy of an
approved internal capital model.”.
Paragraph 6A added
5 The principal Order is amended by adding the following
paragraphs after paragraph 6—
“Declaration of capital and solvency returns
6A Every capital and solvency return made by an insurer
under paragraph 6 shall be accompanied with a declaration
signed by two directors of the insurer and by the insurer‟s
principal representative declaring that to the best of their
knowledge and belief, the return fairly represents the financial
condition of the insurer in all material respects.
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
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Offences
6B Every person who knowingly or recklessly makes a false or
misleading statement or return to the Authority shall be guilty of
a summary offence and liable on conviction to a fine up to
$50,000.”.
Schedule I amended
6 Schedule I of the principal Order is amended—
(a) in paragraph 9 by deleting “
= an amount between 1%
and 10% as approved or prescribed by the Authority”
and substituting “
= an amount between 1% and 10%
as determined by the Authority in accordance with Table
7”;
(b) by adding the following tables after the formula for
ACov—
“Table 7
Operational Risk Charge for
Overall Score Applicable Operational Risk
Charge
5200 6000 6650 7250 7650 7850 8050 8250 8450 1%
INSTRUCTIONS AFFECTING TABLE 7
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
REQUIREMENT) AMENDMENT ORDER 2009
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In this table, “overall score” means an amount equal to the sum of the
aggregate score derived from each of tables 7A, 7B, 7C, 7D, 7E, and 7F.
Table 7A
Corporate Governance Score Table
Criterion Implemented Score
Board sets risk policies, practices
and tolerance limits for all material
foreseeable operational risks at least
annually and ensures they are
communicated to relevant business
units
200
Board monitors adherence to
operational risk tolerance limits
more regularly than annually
200
Board receives, at least annually,
reports on the effectiveness of
material operational risk internal
controls as well as management‟s
plans to address related weaknesses
200
Board ensures that systems or
procedures, or both, are in place to
identify, report and promptly
address internal control deficiencies
related to operational risks
200
Board promotes full, open and
timely disclosure from senior
management on all significant
issues related to operational risk
200
Board ensures that periodic
independent reviews of the risk
management function are
performed and receives the findings
of the review
200
Total XX
COMMENTS
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INSTRUCTIONS AFFECTING TABLE 7A
The total score is derived by adding the score for each criterion of an
insurer‟s corporate governance structure that the insurer has
implemented.
Table 7B
Risk Management Function (‘RMF’) Score Table
Criterion Implemented Score
RMF is independent of other
operational units and has direct
access to the Board of Directors
150
RMF is entrenched in strategic
planning, decision making and the
budgeting process
150
RMF ensures that the risk
management procedures and
policies are well documented and
approved by the Board of Directors
150
RMF ensures that the risk
management policies and
procedures are communicated
throughout the organization
150
RMF ensures that operational risk
management processes and
procedures are reviewed at least
annually
150
RMF ensures that loss events
arising from operational risks are
documented and loss event data is
integrated into the risk
management strategy
150
RMF ensures that risk
management recommendations are
documented for operational units,
ensures that deficiencies have
remedial plans and that progress on
the execution of such plans are
reported to the Board of Directors at
150
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
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least annually
TOTAL XX
COMMENTS
INSTRUCTIONS AFFECTING TABLE 7B
The total score is derived by adding the score for each criterion of an
insurer‟s risk management function that the insurer has implemented.
Table 7C
Risk Identification Processes (‘RIP’) Score Table
Progression
Criterion
Operational Risk Areas
Stage Scoring Fraud HR Outsourcing Distribution
Channel
Business
Processes
Business
Continuity
IT Compliance
1 50 RIP are ad hoc
2 100 RIP have been
implemented but not
standardized across the
organization
3 150 RIP have been
implemented, well
documented and
understood by relevant
staff, and standardized
across the entire
organization
4 200 In addition to Stage 3, RIP
are reviewed at least
annually with a view to
assessing effectiveness and
introducing improvements
TOTAL XX XX XX XX XX XX XX XX
COMMENTS
INSTRUCTIONS AFFECTING TABLE 7C
(a) the total score is derived by adding the individual score for each
operational risk area corresponding to the stage of the insurer‟s
implementation in respect of its RIP;
(b) where the insurer‟s assessment of the operational risk area is
between stages (i.e. exceeds the criterion for given stage, while only
partially meeting the criterion of the next stage), the insurer shall be
deemed to have met the criterion of the lower stage; and
(c) where an operational risk area is not applicable to the insurer‟s
operations, the insurer shall record such fact and the reasons for
arriving at this conclusion in the comments section and be deemed to
have met the criterion of the highest stage.
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
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Table 7D
Risk Measurement Processes (‘RMP’) Score Table
Progression
Criterion
Operational Risk Areas
Stage Scoring Fraud HR Outsourcing Distribution
Channel
Business
Processes
Business
Continuity
IT Compliance
1 50 RMP are ad hoc
2 100 RMP have been
implemented but not
standardized across the
organization
3 150 RMP have been
implemented, well
documented and
understood by relevant
staff, and standardized
across the entire
organization
4 200 In addition to Stage 3, RMP
are reviewed at least
annually with a view to
assessing effectiveness and
introducing improvements
TOTAL XX XX XX XX XX XX XX XX
COMMENTS
INSTRUCTIONS AFFECTING TABLE 7D
(a) the total score is derived by adding the individual score for each
operational risk area corresponding to the stage of the insurer‟s
implementation in respect of its RMP;
(b) where the insurer‟s assessment of the operational risk area is
between stages (i.e. exceeds the criterion for given stage, while only
partially meeting the criterion of the next stage), the insurer shall be
deemed to have met the criterion of the lower stage; and
(c) where an operational risk area is not applicable to the insurer‟s
operations, the insurer shall record such fact and the reasons for
arriving at this conclusion in the comments section and be deemed to
have met the criterion of the highest stage.
Table 7E
Risk Response Processes (‘RRP’) Score Table
Progression
Criterion
Operational Risk Areas
Stage Scoring Fraud HR Outsourcing Distribution
Channel
Business
Processes
Business
Continuity
IT Compliance
1 50 RRP are ad hoc
2 100 RRP have been
implemented but not
standardized across the
organization
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
REQUIREMENT) AMENDMENT ORDER 2009
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3 150 RRP have been
implemented, well
documented and
understood by relevant
staff, and standardized
across the entire
organization
4 200 In addition to Stage 3, RRP
are reviewed at least
annually with a view to
assessing effectiveness and
introducing improvements
TOTAL XX XX XX XX XX XX XX XX
COMMENTS
INSTRUCTIONS AFFECTING TABLE 7E
(a) the total score is derived by adding the individual score for each
operational risk area corresponding to the stage of the insurer‟s
implementation in respect of its RRP;
(b) where the insurer‟s assessment of the operational risk area is
between stages (i.e. exceeds the criterion for given stage, while only
partially meeting the criterion of the next stage), the insurer shall be
deemed to have met the criterion of the lower stage; and
(c) where an operational risk area is not applicable to the insurer‟s
operations, the insurer shall record such fact and the reasons for
arriving at this conclusion in the comments section and be deemed to
have met the criterion of the highest stage.
Table 7F
Risk Monitoring and Reporting Processes (‘RMRP’) Score Table
Progression
Criterion
Operational Risk Areas
Stage Scoring Fraud HR Outsourcing Distribution
Channel
Business
Processes
Business
Continuity
IT Compliance
1 50 RMRP are ad hoc
2 100 RMRP have been
implemented but not
standardized across the
organization
3 150 RMRP have been
implemented, well
documented and
understood by relevant
staff, and standardized
across the entire
organization
4 200 In addition to Stage 3,
RMRP are reviewed at least
annually with a view to
assessing effectiveness and
introducing improvements
TOTAL XX XX XX XX XX XX XX XX
COMMENTS
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
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INSTRUCTIONS AFFECTING TABLE 7F
(a) the total score is derived by adding the individual score for each
operational risk area corresponding to the stage of the insurer‟s
implementation in respect of its RMRP;
(b) where the insurer‟s assessment of the operational risk area is
between stages (i.e. exceeds the criterion for given stage, while only
partially meeting the criterion of the next stage), the insurer shall be
deemed to have met the criterion of the lower stage; and
(c) where an operational risk area is not applicable to the insurer‟s
operations, the insurer shall record such fact and the reasons for
arriving at this conclusion in the comments section and be deemed to
have met the criterion of the highest stage.”
Schedule V repealed and substituted
7 Schedule V of the principal Order is repealed and the following is
substituted—
“SCHEDULE V
(Paragraph 6)
SCHEDULE OF RISK MANAGEMENT
The schedule of risk management of a Class 4 general business insurer
shall provide particulars of the following matters—
(a) governance structure;
(b) intra-group exposures;
(c) effective duration of assets calculation;
(d) effective duration of liabilities calculation;
(e) description of the effective duration of assets and
liabilities calculations and key assumptions;
(f) investment policy;
(g) gross probable maximum loss;
(h) net probable maximum loss;
(i) average annual loss excluding property catastrophe;
(j) catastrophe exposure limits, gross probable maximum
loss and net probable maximum loss by territories and
by statutory lines of business separated by insurance
and reinsurance;
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(k) projected net premiums written, underwriting profit or
loss, and net income or loss;
(l) actual attritional losses and large claims losses in the
relevant year;
(m) financial impact and description of stress and scenario
tests; and
(n) description of the insurer‟s risk management program.
INSTRUCTIONS AFFECTING SCHEDULE V
(a) the governance structure must disclose—
(i) the structure of the board of directors and
executive management, including roles and work
experience of officers; and
(ii) terms of reference of the board of directors and
its sub-committees.
(b) the intra-group exposures must disclose material
transactions between the insurer and other members of
the group to which it belongs.
(c) the effective duration of assets calculation must be
determined using the aggregate of the bonds and
debentures (Form 1A, Lines (2a) (ii) and (3a) (ii)),
preferred stocks (Form 1A, Lines (2c) (ii) and (3c) (ii)),
and mortgage loans portfolios (Form 1A, Line (5c)) as a
basis.
(d) the effective duration of liabilities calculation must be
determined using the reserves (Form 1A, Lines 17 and
18) as a basis;
(e) a description of the process used for determining the
effective duration of assets calculation and effective
duration of liabilities calculation, and key assumptions
for these calculations;
(f) the investment policy must disclose a description of the
insurer‟s investment strategy governing investment
selection and composition of the insurer‟s investment
portfolio;
(g) the gross probable maximum loss for natural
catastrophe losses (prior to reinsurance) must be
INSURANCE (PRUDENTIAL STANDARDS) (CLASS 4 SOLVENCY
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calculated at the 99.0% Tail Value-at-Risk level for
annual aggregate exposure to all risks and all perils,
including reinstatement premiums, for the year following
the relevant year based upon the insurer‟s catastrophe
model;
(h) the net probable maximum loss for natural catastrophe
losses (after reinsurance) must be calculated at the
99.0% Tail Value-at-Risk level for annual aggregate
exposure to all risks and all perils, including
reinstatement premiums, for the year following the
relevant year based on the insurer‟s catastrophe model;
(i) the average annual loss excluding property catastrophe
must be calculated as follows-
(i) the expected net natural catastrophe loss (after
reinsurance), including reinstatement
premiums, for annual aggregate exposure to all
risks and all perils other than those relating to
the property catastrophe statutory line of
business (as described under the Instructions
Affecting Schedule III) for the year following the
relevant year based on the insurer‟s catastrophe
model; and
(ii) the calculation should be from the same
underlying loss distribution used to determine
the gross probable maximum loss and the net
probable maximum loss (excluding the property
catastrophe component);
(j) the catastrophe exposure limits, gross probable
maximum loss and net probable maximum loss by
territories and by statutory lines of business separated
by insurance and reinsurance shall disclose separately
the catastrophe exposure limits, gross probable
maximum loss and net probable maximum loss in
accordance with—
(i) the exposure territories as defined in paragraph
(o) below, or
(ii) other such territories as the Authority shall
approve,
and based on the statutory lines of business (as
described under the Instructions Affecting Schedule III)
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separated into insurance and reinsurance related,
respectively; and catastrophe exposure limits must
disclose the limits underlying the exposures used to
derive the gross probable maximum loss and net
probable maximum loss calculations above;
(k) the projected net premiums written, underwriting profit
or loss, and net income or loss shall disclose the
insurer‟s latest estimate of annual net premiums written,
underwriting profit or loss, and net income or loss for
the year following the relevant year either for the insurer
or on a group basis with disclosure of the estimated
percentage of the insurer‟s contribution relative to the
group;
(l) the actual attritional losses and large claims losses in
the relevant year shall disclose the actual aggregate
losses (classified by the insurer as attritional and large
claims losses in accordance with its own policy)
experienced by the insurer in the relevant year (not
including prior year reserve releases or adverse
development);
(m) the financial impact and description of stress and
scenario tests shall disclose the results from the stress
and scenario tests prescribed by the Authority annually
and published in such manner as the Authority directs;
(n) the description of the insurer‟s risk management
program shall disclose-
(i) a description of the risk management process,
including how the risk management program is
used for strategic management decision-making,
capital allocation and capital adequacy;
(ii) a description of the governance surrounding the
risk management process including the
identification of the owners of the process and
the extent of the board of directors‟ involvement;
(iii) a description of the risk appetite including the
process for setting and embedding risk limits,
and the identification of the types of stress
testing carried out to ascertain the suitability of
the risk appetite; and
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(iv) a description of the process undertaken to
monitor material risk concentration;
(o) Exposure territories-
Zone Territories
1 Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New York, New Jersey, Pennsylvania, Rhode
Island, Vermont, Virginia, West Virginia, the District of
Columbia, Alabama, Arkansas, Louisiana, Mississippi, Texas,
Florida, Georgia, North Carolina, and South Carolina
2 Caribbean
3 Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Montana, Minnesota, Missouri,
Nebraska, Nevada, New Mexico, North Dakota, Ohio,
Oklahoma, South Dakota, Tennessee, Utah, Wisconsin, and
Wyoming
4 California
5 Oregon, Washington
6 Hawaii
7 Canada, Alaska
8 United Kingdom, Continental Europe
9 Australia / New Zealand
10 Japan
11 Nationwide covers
12 Worldwide covers
13 All exposures not included in Zones 1 to 12
Made this 18th day of December, 2009
Deputy Chairman
Bermuda Monetary Authority
