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Bermuda ReportingRequirementsAn overview of statutory andsolvency reporting deliverablesfor general insurersMay 2021

ContentsOverview of reporting landscape4Statutory Financial Statements7Economic Balance Sheet9Bermuda Solvency Capital Requirement13Governance and disclosure19 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements2

Commonly used acronyms in the Bermuda reporting regimeBELBest Estimate LiabilityFCRFinancial Condition ReportALMAsset Liability MatchingGSSAGroup Solvency Self-AssessmentBMABermuda Monetary AuthorityLRSLoss Reserve SpecialistBSCRBermuda Solvency Capital RequirementLRSOLoss Reserve Specialist OpinionCISSACommercial Insurer’s Solvency Self-AssessmentMSMMinimum Solvency MarginCIRACommercial Insurer Risk AssessmentPMLProbable Maximum LossCSRCapital and Solvency ReturnRMRisk MarginEBSEconomic Balance SheetSFSStatutory Financial StatementsECREnhanced Capital RequirementTPTechnical Provisions 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements3

Overview of reporting landscape 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements4

Statutory reporting regimeTo ensure that Bermuda continues to adhere to international standards and best practices for insurance regulation andsupervision, in 2015 the BMA instituted a series of enhancements to its statutory and prudential reporting requirementsfor commercial insurers.Statutory ReportingThe BMA recognizes that insurers having varying risk profiles arising from the nature, scale and complexity of their business. As a result, commercial insurers haveadditional reporting requirements, such as: Every commercial insurer shall, in addition prepare GAAP financial statements in respect of its insurance business for each financial year. A company canchoose to report under US GAAP, Canadian GAAP or another framework (such as IFRS) as their ongoing reporting requirements.What’s audited?Prudential FiltersConsolidated GAAP FinancialsConsolidated StatutoryFinancial Statements – Newrequirement from 2016Unconsolidated StatutoryFinancial Statements 2021 DCB Holding Ltd. and its affiliates.When is it filed?Must file within 4 months of theyear-end unless an extension isobtained, which is usually issued 1month at a time, provided that thecompany is in compliance and thereis a valid reason for the request.Actuarial OpinionCommercial classes require aloss reserve specialistopinion on the TechnicalProvisions on the EBS.The principal representative isresponsible for obtaining theextension.Bermuda Reporting Requirements5

Solvency reporting and capital assessmentAs a Solvency II equivalent jurisdiction, Bermuda adopts a Three Pillar approach to risk-based supervision. Insurers file aCapital and Solvency Return (CSR) within four months of the financial year end.Solvency ReportingAn overarching objective of Bermuda’s solvency regime over the past decade is to achieve and maintain Solvency II equivalence, which effectively enablesBermuda domiciled insurers to conduct business in the EU on a level playing field as EU domiciled insurers. The BMA is keen to sustain and continue to developits risk-based regulatory approach that both (a) meets or exceeds international standards and (b) appropriately reflects the nature of the Bermuda market.To this end, numerous legislation and guidance have been recently issued, that broadly mirror the Three Pillar approach of Solvency II.Pillar 1Quantitative RequirementsRequired capital based onEconomic Balance Sheet(EBS).Bermuda Solvency CapitalRequirement (BSCR)computed using standardformula or approvedinternal model.Calibrated to approach butnot exceed Solvency II. 2021 DCB Holding Ltd. and its affiliates.Pillar 2Risk GovernancePillar 3Risk DisclosurePrepare CommercialInsurer’s Solvency SelfAssessment (CISSA),assessing risk governanceand capital adequacy undernormal and stressedconditions.Beginning with 2016-yearend, prepare FinancialCondition Report (FCR).Integrate at Group levelwhere multiple legalentities exist.To be made publiclyavailable on insurer’swebsite.Outline performance, riskprofile, and organizationalgovernance.Bermuda Reporting Requirements6

Statutory Financial Statements (SFS) 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements7

Statutory financials and scope of auditIn order to streamline the process and minimize duplication of effort, the BMA amended statutory accounting valuationstandards to be consistent with GAAP valuation, subject to certain prudential filters.Scope of the AuditGAAP Financial Statements and Prudential Filters are required to beaudited.The auditor’s opinion is whether the statutory balance sheet, statutoryincome statement, and statutory capital and surplus have beenprepared in accordance with the Act and these Rules.Audited- Forms 1SFS, 2SFS and 8SFSAuditedSome key prudential filters include:GoodwillValued at zero.Other intangiblesValue of future economic benefitsflowing to insurer, only if separable andevidence of similar exchangetransactions; zero otherwise.Prepaids and deferredexpensesValued at zero.Deferred acquisitioncosts (DAC)Valued consistently with GAAP.Contingent liabilitiesDeferred taxassets/liabilitiesAuditedExpected present value of future cashflows.Valued consistently with GAAP. 2021 DCB Holding Ltd. and its affiliates.Source: Bermuda Monetary AuthorityBermuda Reporting Requirements8

Economic Balance Sheet (EBS) 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements9

The Economic Balance Sheet frameworkBeginning with financial year 2016, the EBS framework forms the basis used to determine capital requirements forBermuda commercial insurers. The Loss Reserve Specialist is also required to render an opinion on the reasonablenessof EBS technical provisions.AssetsPrinciples of EBSAssets and liabilities are assessed and included onthe EBS at fair value in line with GAAP principles, or,if GAAP does not require an economic valuation,following the EBS fair value hierarchy.Free surplusRequired capital overMSMSpecifically, a Technical Provision is required forinsurance liabilities. It is calculated as follows:Minimum SolvencyMargin (MSM) Best estimate cashflows Discounted for time value of money andilliquidityMarket value of assets 2021 DCB Holding Ltd. and its affiliates.Assets backing TechnicalProvisionWhen applying the EBS framework, the principle ofsubstance over form is applied, for example whenselecting actuarial methodologies.Enhanced CapitalRequirement (ECR)Risk margin Plus, a risk margin for uncertainty inherent in thecashflowsBecause EBS is designed to evaluate a company’slevel of economic surplus, non-economicassumptions are zeroed.LiabilitiesEBS Technical ProvisionBest estimate liabilityBermuda Reporting Requirements10

Unpacking the Technical ProvisionThe Technical Provision represents the amount required to meet insurance obligations as they fall due, and compensatecapital providers for assuming the risk inherent in these obligations.1. Liability cash flowsare projectedaccording to theactuary’s bestestimate assumptionsfor the relevant riskdrivers.2. Cash flows arediscounted to reflecttime value of moneyand illiquidity. TheBMA providescalibrated discountcurves for widely usedcurrencies.Best estimate cashflows 2021 DCB Holding Ltd. and its affiliates.Discounted for timevalue of money andilliquidity3. A risk margin isadded to reflect theinherent uncertaintyin the best estimatecash flows. Thisreflects the amountof compensationrequired by capitalproviders for bearingthis uncertainty. Risk margin4. The EBS TechnicalProvision is the totalliability valuerecorded forinsurance obligations.The Loss ReserveSpecialist renders anopinion on thereasonableness ofoverall TPs. EBS TechnicalProvisionBermuda Reporting Requirements11

Other EBS considerationsThere are several other new concepts in the EBS framework that build on the statutory basis toward a moreeconomically consistent technical provision. Notably, insurers need to calculate a risk margin, adjust reinsurancerecoverable for default costs, and render an actuarial opinion on the overall reasonableness of the TPs.Risk marginCounterparty defaultA risk margin is added to the BEL to arrive at the total EBStechnical provision. Although the BEL by definition reflects theexpected value of insurance benefits payable, there isinherent uncertainty in the underlying cash flows.Under the EBS framework, reinsurance recoverables must be adjusted for expected losses due tocounterparty default. The preferred methodology mirrors widely used expected credit lossapproaches.Conceptually, the risk margin represents the compensationrequired by the insurer to bear this uncertainty. The preferredmethodology is the Cost of Capital approach, but certainapproximations are permissible. Under this approach, theinsurer calculates the cost of holding its required capital overthe lifetime of its insurance obligations, as follows:Bound But Not Incepted (“BBNI”) Business𝑅𝑅𝑅𝑅 𝐶𝐶𝐶𝐶𝐶𝐶 𝐸𝐸𝐸𝐸𝐸𝐸𝑡𝑡1 𝑟𝑟𝑡𝑡 1𝑡𝑡 1 𝐸𝐸𝐸𝐸𝐸𝐸𝑡𝑡 is the insurers required capital at time t, per thestandard formula or its own internal model. 𝑟𝑟𝑡𝑡 is the risk-free discount rate 𝐶𝐶𝐶𝐶𝐶𝐶 is the cost of capital – currently 6%Provisions must also be set aside for business to which the insurer is bound to as at the valuationdate, even though the underlying contracts may not yet have incepted.Actuarial opinionUnder the new reporting regime, an actuarial opinion is required on the reasonableness of EBSTPs.The Loss Reserve Specialist should specifically discuss the following: Commentary on data underlying the EBS TPs Discussion of how Events Not In Data (ENIDs) are incorporated into their actuarial estimates Discussion of how the Loss Reserve Specialist arrived at their actuarial estimates of theinsurer’s aggregate TPs Commentary on the methodology used to arrive at the adjustment included in the bestestimate of reinsurance recoveries that was made to reflect expected losses due tocounterparty default 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements12

Bermuda Solvency Capital Requirement (BSCR) 2021 DCB Holding Ltd. and its affiliates.Bermuda Reporting Requirements13

Capital requirementsInsurers are required to demonstrate capital adequacy with respect to the Bermuda Solvency Capital Requirement(BSCR), which is computed per the BMA’s standard capital model or an approved internal capital model.Risk categoriesGeneral insurers must calculate capital requirements with respect to the categories to theright. Most capital calculations are determined by multiplying the prescribed capital factorby some defined exposure amount. Some key factors include:Diversified BSCROperational RiskCapitaladjustments Premium: ranges from 15-55% of diversified net written premium with concentrationadjustment Reserve: ranges from 12-52% of diversified EBS BEL with concentration adjustment Catastrophe: Net PML less CAT premium less credit risk charge on reinsurancerecoverable Investments: generally, market value x factor ranging by riskiness of assetMarket RiskAggregationInsurance RiskFixed receivableReserve Interest: duration or shock-based methodology on net assets Market: generally, market value x factor ranging by riskiness of assetCredit RiskInterest/LiquidityCatastropheCapital requirements are aggregated in a straightforward manner, applying a very simpledependency structure as follows: Half the credit risk charge is perfectly correlated with reserve riskConcentration All other pairs are independent of each other Operational risk and capital adjustments are added on post diversification 2021 DCB Holding Ltd. and its affiliates.CurrencyBermuda Reporting Requirements14