Stress testing in a SII environment

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Pre-Screening and Diagnostics • A good understanding of the local insurance and financial/capital markets is a prerequisite for any assessment of insurers’ vulnerabilities to particular risks. ► It helps in the design and the calibration of the stress tests ► It provides valuable insights into the potential strengths and weaknesses of the local insurance market. • When assessing the market as a whole, it is important to look at the distribution (low and high percentiles, median and mean) • The analysis as part of the regular market monitoring should cover data, such as ► General assessment of economic, monetary and capital market conditions ► Solvency and performance and other sector specific measures of insurers ► Market competition ► Qualitative information INTERNATIONAL MONETARY FUND 12
Indicators for economic, monetary, and capital market conditions (II) Data type Economic, monetary, and capital market conditions Socio- demographic changes, disasters, etc. Household (and/or corporate) leverage Real estate prices Market competition Impact on insurers Adverse economic conditions generally decrease demand for insurance Unexpected deterioration in underwriting profitability may erode liquidity buffer and impact solvency. Inadequate adjustment to sociodemographic changes may in the long run lead to under-reserving / under-pricing Decreases demand for insurance (to be assessed together with surrenders and lapses) Declines in real asset values may generate collateral calls on certain products and outstanding credit lines (linked to aspect above) Important asset on many insurers’ balance sheets Intense market competition may encourage insurers to take on additional investment or product risk, potentially leading to underpricing or under-reserving of the risks (Two important causes for insurance failures). It may also indicate higher interlinkages. INTERNATIONAL MONETARY FUND 13
Page 1 and 2: Stress testing in a Solvency II env
Page 3 and 4: Stress test - motivation and defini
Page 5 and 6: Motivation • Stress tests are a u
Page 7 and 8: Type of stress test Stress testing
Page 9 and 10: Stress testing as part of a broader
Page 11: Surveillance cycle - example Vulner
Page 15 and 16: Solvency, performance, and other se
Page 17 and 18: How to use these data • The data
Page 19 and 20: Questions • What are the main ste
Page 21 and 22: Identification of stresses (I) •
Page 23 and 24: Specification of specific scenarios
Page 29 and 30: Final output The impact of the stre
Page 31 and 32: Communication of results • Based
Page 33 and 34: Important to remember A stress test
Page 35: Useful background material Data dia

Stress testing in a SII environment

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