Bermuda's insurers would lose nearly 30% of their capital surplus under the weight of four investment stress tests the Bermuda Monetary Authority (BMA) put them through, and nearly 20% in the face of sharp inflation.
The BMA published the results of various tests, of their underwriting as well as investment resilience, last week.
An inflationary investment-test - "similar to 1973" but applied over many years – which assumed the Fed did nothing to counter inflation for three years required insurers to raise the yield curve across maturities for one year by between 510 and 1,130 basis points. Their surplus capital left was 82.8% (mean) and 85.1% (median) of pre-test levels, respectively.
Group 3A and 4 insurers underwent eight single-shock tests, triggered by moves in equity returns, credit spreads and defaults based on historical data about how interest rates, FX rates and sharemarkets developed. The BMA defines Class 3A underwriters as "small commercial insurers" whereas Class 4 firms have capitalisations of at least $100m, and write specific lines of risk.
The equity shock - a 40% shareprice fall - matches 'Black Monday' in 1987, resulting in mean/media capital and surplus of 94.9% and 97.6%, respectively.
The BMA also modelled a 40% devaluation in illiquid alternatives, with the insurers saying if quick sales were prevented and reporting any "material consequences". The mean/median post-stress capital and surplus were 91.1% and 96.3%, respectively.
One stress, put upon just some of them, involved debt haircuts, to mimic a European banking crisis with defaults - producing surplus capital 99% (mean) and 99.9% (median) of pre-stress levels, respectively.
A test of a sharp jump in the US yield curve produced 92.8% (mean) and 95% (median), respectively.
And a more generalised widening of credit spreads, affecting both for-sale and hold-to-maturity assets, including structured products, asset-backed securities, and non/agency mortgage-backed securities resulted in results of 86.6% and 90.1% of mean/median post-stress capital and surplus.
Face all the scenarios at once and insurers emerge with mean/median post-stress capital and surplus measures of 69.9% and 74.1%, respectively, with only "the majority" withstanding the pressure, the BMA said.
Insurers holding mortgage-backed securities had to increase default rates to between 5.5% and 9.5%, model a 40% annual constant prepayment rate. The scenarios produced mean/median post-stress capital and surpluses of between 86.1% and 89.3%, and 95.4% to 98.4%, respectively.
Effects of stress tests on Bermudian insurers' surplus & capital, 2021
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Companies:BMA