Welcome to the second installment in our series of papers supporting life insurers under the Bermuda Scenario-Based Approach (SBA).  The first paper “Untangling complexity” was focused on helping insurers understand the SBA framework under the amendments the BMA delivered in Spring 2024^[1].

Now that insurers have implemented the required enhancements to the SBA framework, we are turning our attention to ways to enhance asset liability matching and portfolio efficiency through innovative solutions involving derivatives and structured solutions. This can enable insurers to be more competitive in their pricing while better managing asset liability risks.

There have been a number of exciting developments in the toolkit for derivatives and structured solutions that solve many of the cash flow matching problems facing asset intensive life (re)insurers. Many of these solutions have already been road-tested in the UK market by insurers subject to Matching Adjustment and we believe can be equally effective in the SBA framework. In this paper we set out the different derivative based tools available to life insurers explaining how they operate and fit into the Bermuda regulatory framework.

Finally, we revisit our SBA optimization framework from the first paper and show how by adding derivative solutions we can significantly enhance the level of SBA illiquidity premium. This is achieved through a combination of better asset liability matching which allows more of the portfolio to be invested in non-government bonds, as well as enhancing the investment opportunity set.

^{[1] See Insurance (Prudential Standards) (Class C, Class D And Class E Solvency Requirement) Amendment Rules 2024] enhancing the Scenario-Based Approach (SBA)}