Stress testing in a SII environment
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Specification of specific scenarios (I)<br />
<strong>Stress</strong> <strong>test<strong>in</strong>g</strong> <strong>in</strong>volves chang<strong>in</strong>g the value of specific risk factors and determ<strong>in</strong><strong>in</strong>g the<br />
impact of such changes on the <strong>in</strong>surer’s bus<strong>in</strong>ess (balance sheet). The impact is<br />
measured aga<strong>in</strong>st pre-def<strong>in</strong>ed output metrics (e.g. solvency ratios).<br />
• Capital market events: Although the past is not necessarily a good predictor of the<br />
future, analysis of past price movements can help identify specific scenarios. The<br />
time series analysed should ideally be longer than a typical economic cycle.<br />
• Default of bank<strong>in</strong>g counterparty: Specify specific haircuts dependent on the<br />
seniority of the asset, e.g.<br />
► 100% loss on equity, 100% loss on subord<strong>in</strong>ated debt, 50% on senior bonds, etc.<br />
► Historic recovery rates may <strong>in</strong>form the scenario<br />
INTERNATIONAL MONETARY FUND 23
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