Bermuda leads the way when it comes to catastrophe modelling, but there is still some work to be done with documentation and governance procedures.

That is according to Matthew Elderfield, CEO of the Bermuda Monetary Authority (BMA), who was speaking following the release of the BMA's first comprehensive survey of economic capital modelling tools and techniques being used by large re/insurers in the Bermuda market.

The Authority carried out the survey to research and analyse current capital modelling practices within the Island's re/insurance industry, specifically among Class 4 insurers, followed up with discussions with companies about the issue.

Mr. Elderfield said: "The survey results show that the Bermuda market as a whole demonstrates a high degree of sophistication in its economic modelling capability, particularly in the modelling of catastrophic risk.

"However, documentation and governance procedures appear to be under-developed across the Bermuda market, and there is more work to be done in a number of areas as we move into the next phase of adopting models as the basis for regulatory solvency purposes.

"The Authority is using a phased approach to introduce this new framework, taking the results of this survey and recent lessons learned from the use of modelling to develop prudent minimum criteria for the use of internal models that address these weaknesses, while still encouraging innovation in risk management practices."

The proposed internal models framework was developed to operate parallel to the Bermuda Solvency Capital Requirement (BSCR), a standardised risk-based capital model the Authority implemented earlier this year to determine regulatory capital requirements for Class 4 (re) insurers.

The BSCR has been set as a standard model that reflects the average inherent business risk of the Class 4 market. Under the proposed internal models framework if an insurer can demonstrate that its own model better reflects the inherent risk to its business, it may apply to the Authority to use its model to determine regulatory capital.

Mr. Elderfield said that the information about current modelling practices in the Bermuda market derived from the survey helps the BMA to work out appropriate criteria and regulatory requirements for the next phase of development in the internal models initiative.

"An insurer's internal model will have to satisfy certain criteria to be approved for determining regulatory capital," he said.

"Therefore the next phase of our work will involve developing standards, and the application and review process, for assessing and approving internal capital models as the basis for calculating regulatory capital.

"We will base that assessment on criteria such as how well the internal model is integrated into an insurer's risk management programme; what type of governance processes and controls the company applies to its model; and how appropriate the model is for determining regulatory capital requirements. The intention is to have a pilot model approval process published by the second quarter of 2009."