Global

Details

  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 5/2/2014

Stress testing for insurers 

On 30 April 2014, the European Insurance and Occupational Pensions Authority (EIOPA) announced the details of an EU-wide stress test for the insurance sector, together with the technical specifications that insurers will need to use both for the stress test and during the preparatory period leading up to Solvency II implementation on 1 January 2016.

The stress test comprises two modules and participation may differ between these. However, in both cases EIOPA intends this stress test to cover the major insurers in each member state.


The stress test comprises:


  • a core stress covering both market-related stresses and independent insurance related shocks, consisting of:
    • two different market-related stress tests, one with a sharp increase in bond yields and other interest rates, and the other with a sharp decline in equity prices; and
    • five insurance-related shocks, ranging from longevity assumptions to catastrophes, each shocked at two different severities; and
  • the impact of a low yield environment, which continues EIOPA’s recent work on the impact of a prolonged period of very low interest rates, with an impact on guaranteed life insurance payments.

The core stress test will apply at the level of the highest insurance group within the European Economic Area (EEA), but the low yield scenarios will be applied to solo insurers only.


Insurance companies will be expected to assess the impact of these adverse scenarios on their eligible own funds under Solvency II, with a recalculation of capital requirements (solvency (SCR) or minimum (MCR) levels) not required. EIOPA and the local NSAs will use the results of the stress tests to define areas for further investigation and to inform supervisory responses.


Consistent with prior years’ stress tests, the results of the stress tests will be published (in November this year) on an aggregate basis, with no firm-by-firm results. This remains in stark contrast to the approach adopted by the European Banking Authority regarding the banking stress test, which was also announced on 30 April.

This is important for insurers because:

This could be the last stress test before Solvency II comes into force. It will allow supervisors to gain insights into the possible solvency position of some of the major participants in the market.


The technical specifications give the greatest indication yet of the likely calibration that will be required in the live regime, providing firms and supervisors with insight into future solvency levels under the new prudential regime. This is therefore helpful information for firms that are not participating in the stress test, as well as for those that are.


Possible implications for insurers

  • The stress test exercise will run until mid July. This will significantly increase the burden of Solvency II preparations.
    Firms will need to factor this into their timetables and consider how to build the results into their forward looking assessment of own risks (FLAOR) work. In particular, participants should decide whether they wish to defer finalising their FLAOR report until their stress test results are known, given the requirement for submission to the NSA within two weeks of its finalisation.
  • There should be a high correlation between participants in the stress test and firms participating in the preparatory period reporting. These firms will need to be able to reconcile their solvency position under the stress test reporting (effective date 31 December 2013) and the first reports under the preparatory guidelines (effective date 31 December 2014).
  • Where solvency levels appear likely to decrease on transition from current regimes to Solvency II, supervisors may increase regulatory scrutiny to ensure firms are prepared for this and that no policyholder detriment may occur.
  • Those firms with low expected solvency levels under Solvency II should consider and refine their contingency plans and intentions regarding use of the various phasing-in provisions.

Further insights

To discuss the implications further please contact:

Janine Hawes

Ferdia Byrne

Roger Jackson

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