The European Insurance and Occupational Pensions Authority (EIOPA) has launched an EU-wide stress test for the insurance sector.
The test package comprises two modules. The core module of the exercise includes two adverse market scenarios, covering financial asset stresses(sovereigns, corporate bonds and equities) as well as shocks to real estate assets prices’ and interest rates stresses. The adverse market scenarios are complemented by a set of independent insurance-specific shocks covering mortality, longevity, insufficient reserves and catastrophe shocks. The second module addresses the impact of a low yield environment and is a follow-up to EIOPA’s Opinion on Supervisory Response to a Prolonged Low Interest Rate Environment. The adverse market scenarios have been developed in cooperation with the European Systemic Risk Board (ESRB).
It is envisaged that the stress test will cover at least 50% of the market share in each country both of life and non-life segments. Its results will provide a clear vision on the resilience of the insurance sector to different shocks and identify issues that require further supervisory response.
The technical basis of the stress test is the new insurance regulatory regime Solvency II, which will apply as of 1st January 2016. Simultaneous with the launch of the exercise, EIOPA has published the Solvency II Technical Specifications for the preparatory phase that will provide a ground for undertakings to value assets and liabilities and to calculate solvency/minimum capital requirements and own funds.
The exercise will be run in close cooperation with national supervisory authorities (NSAs). The NSAs will collect data from undertakings in July and validate the information before it is aggregated at the EU level.
To improve consistency in the calculations, during August and September, EIOPA in cooperation with NSAs will conduct an EU-wide validation of the data received. Results of the stress test analysis will be disclosed in November.
To facilitate the participation of undertakings in the exercise, EIOPA will hold a workshop and will launch a Q&A tool to address queries raised by participants when completing the test.
Commenting on the announcement, UK Solvency II leader, Charles Garnsworthy, PwC, said "The announcement was another important milestone in the journey towards Solvency II implementation. The technical specifications released by EIOPA will form the basis for the forthcoming stress-testing exercise, and for Solvency II interim reporting during 2014 and 2015. This announcement had been eagerly anticipated by the insurance industry, which had hoped that clarity would emerge on key remaining areas of uncertainty, most notably around how the long-term guarantee package should be interpreted and applied.
The technical specifications have not changed significantly from those used for the long-term guarantee assessment in January 2013-whilst this is good news for many insurers who will not need to significantly re-build existing models or alter existing methodologies, it also means that individual firms will be required to develop and apply their own "house view" on remaining key areas of uncertainty, such as the admissibility of callable bonds and mortgage assets for the matching adjustment.
This is the first stress testing exercise conducted by EIOPA since 2011, and market risk remains a key area of focus. Firms will be particularly interested at the addition of a sovereign spread stress, as to date many firms have treated sovereign debt as equivalent to risk-free with their internal models. With final agreement now reached on the long-term guarantee package, these stress tests will be more insightful for firms as well as regulators.
In parallel with this stress testing exercise,EIOPA is also running an exercise to assess the impact of low yields on the insurance sector-this could double the workload for those firms who are required to complete the stress testing exercise at a Group level and the low yields assessment at an individual entity level. Some UK general insurers also face having to complete a separate stress testing exercise for the PRA later in 2014, although the burden should be less for life firms which will not be subject to a PRA stress testing exercise this year."
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