The Prudential Regulation Authority (PRA) wants to get feedback from firms and industry participants prior to the insurance stress test it will be conducting starting July.
In a letter sent to insurers, the PRA’s technical head of insurance Stefan Claus wrote: “General insurers will be most familiar with this exercise, as it represents an evolution of the stress testing exercises conducted in 2015 and 2017. For life insurers, this exercise captures potential risks that were not fully covered under last year’s EIOPA (European Insurance and Occupational Pensions Authority) stress test.
“Alongside these market-wide stress tests, we will also be requesting a climate scenario designed to provide additional market impetus in this area, and to inform the bank’s development of a consistent and effective approach to climate-focused scenario analysis.”
Claus said the purpose of the letter is to seek – until the end of May – industry input on any aspects of the insurance stress test ahead of the regulator’s formal announcement to request participation on July 01. The exercise will then run until September 30.
According to the PRA, for the 2019 stress test it will be requesting the participation of Category 1 and 2 general insurers, the largest Lloyd’s syndicates, the Society of Lloyd’s, and life insurers with a significant exposure to annuity products.
Meanwhile the regulator clarified that the insurance stress test is not a pass/fail exercise, nor is it designed to set capital buffers. It said the objectives in conducting the exercise are to inform the PRA’s view of sector risks and assist in the supervision of individual firms.
In terms of systemic risks or sectoral behaviours, for instance, the aim is to assist in understanding the extent to which insurers make business decisions that are appropriate for the company but may not result in the best outcomes when taken across the entire sector.
Other goals of the insurance stress test include the areas of counterparty dependencies, exploratory risks, effectiveness of risk management, and assessment of modelling approaches.