The risk margin is one of the more contentious metrics of modern risk-based insurance regulatory frameworks. It is calculated as the difference between the technical provisions and best estimate liabilities and relies on a number of assumptions relating to the cost of capital.
As such it represents a judgment, one which must balance between safety and profitability. This fundamental tension sits at the heart of the frameworks and inevitably sets regulators and the industry at loggerheads with the latter arguing for a lower margin.
The difficulty is summed up nicely in a 2020 Institute and Faculty of Actuaries paper that concludes that while a risk margin in necessary: “its size depends on the level of security desired, and so is primarily a political question.”
Assessing the scope of risk margin use by Bermudan insurers
Given its impact on an insurer’s available capital, the size of the risk margin is of considerable interest. Analysis conducted by Solvency II Wire Data’s Bermuda Insurance Database provides an insight into the use of the risk margin in the Bermuda insurance market.
The analysis is based on a sample of 105 Bermudan insurers subject to the Bermuda BSCR regulation with total technical provisions of USD 401 billion in 2024 (2023 USD 385 billion). The total risk margin for the sample is USD 23.4 billion in 2024 (2023 USD 25.1 billion).
Given that the risk margin is a component of the total technical provisions, one metric for assessing change over time is looking at the size of the risk margin relative to the total technical provisions. By this metric the risk margin for the sample remains stable over the period.
Risk margin distribution
The chart below shows the distribution of the risk margin as a proportion of total technical provisions for the sample.
For the majority of firms the risk margin is between 5% to 15% of total technical provisions.
Negative values are due to firms having negative technical provisions, although the risk margin amount is always positive.
Risk margin by insurance class
Looking at the sample by insurance class reveals that Class C and Class E insurers tend to have a relatively lower risk margin proportion relative to the other classes. Although outliers can be found throughout.
(no) Correlation between risk margin and ECR ratio
The analysis also looks at the potential correlation between the change in the risk margin and the level of ECR ratio. 60% of the firms in the sample reported a decrease in the proportion of the risk margin.
The chart below plots the ECR ratio on the X-axis and the risk margin change on the Y-axis.
The distribution of the risk margin change relative to the ECR ratio does not point to a particular correlation between the two.
The risk margin in Bermuda
There are no official statistics on the size of the risk margin in the Bermuda insurance market. The analysis sheds light on the use of the risk margin and its relative proportion to the total technical provisions, contributing to the ongoing debate on solvency and profitability of modern risk-based insurance regimes.
