Solvency Assessment and Management: Pillar II - Sub Committee

Stress Testing Task Group

Position Paper 881 (v 4)
Macro-Prudential Stress Testing

EXECUTIVE SUMMARY

1. INTRODUCTION AND PURPOSE

The purpose of the document is to advise and recommend, based on research conducted on
other jurisdictions (insurance supervisory authorities) to the Registrar the types of stress-
testing and stress-testing governance that should be implemented in South Africa as part of
a macro-prudential stress testing programme.
In designing and formulating these recommendations the stress testing task group has been
asked to consider the key objectives of the Financial Services Board (FSB) and specifically
the main purposes of prudential supervision. In essence, stress testing is seen as one of the
supervisory tools that assist the Registrar in facilitating pro-active supervision and also
addresses the objectives of having sound financial institutions and ensuring systematic
stability within the financial sector.
In order to address the above objective, the following was considered in formulating the
recommendations contained in section 7 below:
 Stress tests should be focused on both a micro-prudential (insurer and insurance
group perspective) and a macro-prudential (system-wide) perspective;
 Insurer-designed stress tests; and
 Supervisory prescribed stress tests.
The approach taken by the task group to inform the recommendations was to identify a
number of international supervisory regimes and establish their respective approaches to
stress testing. A summary of the research by jurisdiction is shown in section 5.
Section 6 sets out some specific aspects of the South African insurance environment that
was considered in formulating the final set of recommendations outlined in section 7.
It is important to note that this discussion document is intended to provide the FSB with
guidance and recommendations on a stress testing framework. A separate document will
be prepared by this task group intended as guidance to smaller insurers on how to
conduct stress testing.

1
Position Paper 88 (v 4) was approved as a FINAL Position Paper by Steering Committee on 23 June 2014.
 Solvency Assessment and Management: Steering Committee
Position Paper 88 (v 4) – Macro-Prudential Stress Testing

2. INTERNATIONAL STANDARDS: IAIS ICPs

Over the last number of years the International Association of Insurance Supervisors (IAIS)
was involved in a process of refining and modernising its insurance core principles (ICP).
The IAIS issued on 1 October 2011 all its ICPs in a single document.
Under paragraph 8.3.4 of this document the stress and scenario testing concept was
introduced and highlights the following:
“The risk management function should establish, implement and maintain appropriate
mechanisms and activities to conduct regular stress testing and scenario analyses as
defined in ICP 16 Enterprise Risk Management for Solvency Purposes”.
Paragraph 16.0.8 of ICP 16 states that risk limits of an insurer should be set after careful
consideration of corporate objectives and circumstances and, where appropriate, should
take into account the projected outcomes of scenarios run using a range of plausible future
business assumptions which reflect sufficiently adverse scenarios.
Paragraph 16.1.6 states that the level of risk borne by the insurer should be assessed
regularly using appropriate forward-looking quantitative techniques such as risk modelling,
stress testing, including reverse stress testing, and scenario analysis.
Paragraph 16.1.14 – Stress testing measures the financial impact of stressing one or
relatively few factors affecting the insurer.
Scenario analysis considers the impact of a combination of circumstances which may reflect
extreme historical scenarios which are analysed in the light of current conditions. Scenario
analysis may be conducted deterministically using a range of specified scenarios or
stochastically, using models to simulate many possible scenarios, to derive statistical
distributions of the results.
Reverse stress testing, which identifies scenarios that are most likely to cause an insurer to
fail, may also be used to enhance risk management. While some risk of failure is always
present, such an approach may help to ensure adequate focus on the management actions
that are appropriate to avoid undue risk of business failure.
The focus of such reverse stress testing is on appropriate risk management actions rather
than the assessment of financial adequacy and so may be largely qualitative in nature
although broad assessment of associated financial impacts may help in deciding the
appropriate action to take.
Paragraph 16.2 states that the supervisor requires the insurer‟s measurement of risk to be
supported by accurate documentation providing appropriately detailed descriptions and
explanations of the risks covered, the measurement approaches used and the key
assumptions made.
Paragraph 16.3 - The supervisor requires the insurer to have a risk management policy
which outlines how all relevant and material categories of risk are managed, both in the
insurer‟s business strategy and its day-to-day operations.
Paragraph 16.4 - The supervisor requires the insurer to have a risk management policy
which describes the relationship between the insurer‟s tolerance limits, regulatory capital
requirements, economic capital and the processes and methods for monitoring risk.
Paragraph 16.6.7 states for complex investment strategies, aspects to consider include
liquidity and responsiveness to sudden market movements. Stress testing, as well as
contingency planning for stressed situations, is essential.

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 Solvency Assessment and Management: Steering Committee
Position Paper 88 (v 4) – Macro-Prudential Stress Testing

Supervisors should require the results of the most material risk modelling, stress testing and
scenario analysis and the key assumptions underlying them to be reported to them, as
appropriate to the nature, scale and complexity of the risks, and have access to all other
results if requested. Where a supervisor considers that the calculations conducted by an
insurer should be supplemented with additional calculations, it should be able to require the
insurer to carry out those additional calculations. Where the supervisor considers that the
insurer‟s response to the results of its risk modelling, stress testing and scenario testing are
insufficient it should be able to direct the insurer to develop a more appropriate response.
Supervisors should also consider available reverse stress tests performed by insurers where
they wish to satisfy themselves that appropriate action is being taken to manage the risk of
business.

While insurers should carry out stress testing and scenario analysis and risk modelling that
are most appropriate for their businesses, supervisors may also develop prescribed or
standard tests and require insurers to perform them when circumstances are appropriate.
One purpose of such testing may be to improve consistency of testing among a group of
similar insurers. Another purpose may be to assess the financial stability of the insurance
sector to economic or market stresses or other stresses that apply to a number of insurers
simultaneously, such as pandemics, or major catastrophes. Such tests may be directed at
selected insurers or all insurers. The criteria for scenarios used for standard tests should be
developed as appropriate to the risk environment of insurers in each jurisdiction.

Forward-looking stress testing, scenario analysis and risk modelling of future capital
positions and cash flows whether provided by the insurer‟s own continuity analysis or in
response to supervisory requirements is a valuable tool for supervisors in assessing the
financial condition of insurers, Such testing informs the discussion between supervisors and
insurers on appropriate planning, comparing risk assessments against stress test outcomes,
risk management and management actions and enables supervisors to consider the
dynamic position of insurers and form a high-level assessment of whether the insurer is
adequately capitalised to withstand a range of standardised and bespoke stresses.

3. EU DIRECTIVE ON SOLVENCY II: PRINCIPLES (LEVEL 1)

The EU directive does not cover stress testing specifically, beyond providing the regulator
with the ability to require stress testing results from an insurer. Based on the task group
recommendations, the current draft of the new insurance bill will allow the regulator the
ability to require insurers to perform stress testing from time to time.

4. MAPPING ANY PRINCIPLE (LEVEL 1) DIFFERENCES BETWEEN IAIS ICP & EU

DIRECTIVE

Not applicable.

5. INTERNATIONAL SUPERVISORY APPROACH TO STRESS TESTING

The task group identified the following jurisdictions to be considered before formulating
recommendations to the FSB:
 United Kingdom

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 Solvency Assessment and Management: Steering Committee
Position Paper 88 (v 4) – Macro-Prudential Stress Testing

 Hong Kong
 Australia
 Canada
 Bermuda
 Switzerland
As each jurisdictions approach was expected to be different a specific set of questions was
formulated to allow more focused research. In particular the following questions were
addressed in each case:
1 What the regulator does with this information and whether the stress testing forms part of
the capital calculation or not.
2 Number of scenarios to be modelled.
3 Whether stress testing levels are prescribed or left to the company‟s discretion? If
prescribed what is the required levels?
4 Before and after management actions allowable?
5 Whether reverse stress testing is required or not?
6 Frequency of reporting?
7 Point in time stress testing at reporting date only or projected solvency position?
8 Governance around the individual stress testing?
9 Format of stress testing?
10 Group-wide stress testing used?
11 The definition of financial soundness?

The approach did not specifically focus on macro-prudential stress tests but incorporated the
regulatory approach to micro-prudential stress testing as well.

Please see Annexure A for a comparison of the various jurisdictions.

6. ASSESSMENT OF AVAILABLE APPROACHES GIVEN THE SOUTH AFRICAN

CONTEXT

6.1 Discussion of inherent advantages and disadvantages of each approach

The research indicated that there are broadly 4 approaches taken by regulators. These are:
 Prescribed scenarios only
 Prescribed scenarios plus additional scenarios identified by the company (usually the
actuary‟s responsibility)
 Principle based with no prescribed scenarios and very little guidance.
 Principle based with no prescribed scenarios and detailed guidance on approach
expected.

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Solvency Assessment and Management: Steering Committee
Position Paper 88 (v 4) – Macro-Prudential Stress Testing
The advantages and disadvantages of each of the approaches are outlined in more detail
below.
Prescribed scenarios only
Advantages
 Easy to perform industry wide comparison
between companies.
 Once established by companies, should be
easy and quick to perform from period to
period. This also implies a lower cost of
compliance which will be welcomed by
smaller firms.
Prescribed scenarios plus additional identified by company
Advantages
 Easy to perform industry wide comparison
between companies.
 Once established by companies, should be
easy and quick to perform from period to
period.
 Provides additional information on company
specific risks.
Principle based with no prescribed scenarios and very little guidance
Advantages
 Consistent with intention of SAM to be
principle based.
 Should be a more appropriate reflection of
the risk faced by an individual insurer.
 As it is principle based, the lack of rules often
implies a lack of loopholes.
 It will inform the regulator of the whole
universe of possible risk scenarios. One
insurer may identify an important risk
scenario that was not identified by its
competitors. This will improve the overall
coverage of risk scenarios considered by all
insurers over time.
Disadvantages
 May not reflect inherent risk exposure of
individual companies.
 Will only really apply to the average
company, or the company profile to which the
scenarios were calibrated.
 New scenarios developing due to market
changes or changes in products may not be
identified – this will be contradictive to risk-
based regulation.
Disadvantages
 May still not reflect inherent risk exposure of
individual companies.
 Will only really apply to the average
company, or the company profile to which the
scenarios were calibrated.
 Will require additional time and resources
from the FSB to analyse additional scenarios.
 The prescribed scenarios will become the
basic standard and very little additional
scenarios (if any) will be added voluntarily.
Disadvantages
 Will be difficult to compare companies across
the industry as they may all select a different
set of scenarios. – [Potential solution is to
request specific scenarios from selected
insurers as part of industry stress testing]
 Will place a strain on the resources and time
of the FSB as each submission will require
detailed analysis by the FSB.
 Smaller companies may not have the
resources and expertise to define and
establish appropriate scenarios. – [Potential
solution is to issue separate more detailed
guidance for smaller insurers]
 There is very limited guidance which could
result in a broad range of potential scenarios
from the industry.
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Solvency Assessment and Management: Steering Committee
Position Paper 88 (v 4) – Macro-Prudential Stress Testing

Principle based with no prescribed scenarios and detailed guidance on approach

expected

Advantages Disadvantages

 Consistent with intention of SAM to be  Will be difficult to compare companies across

principle based.
 Should be a more appropriate reflection of
the risk faced by an individual insurer.
 As it is principle based, the lack of rules often
implies a lack of loopholes.
 It will inform the regulator of the whole
universe of possible risk scenarios. One
insurer may identify an important risk
scenario that was not identified by its
competitors. This will improve the overall
coverage of risk scenarios considered by all
insurers over time.
 Level of consistency achieved by issuing
detailed guidance on the principles.
A few key features that seems to apply to most of the regulatory approaches are:
the industry as they may all select a different
set of scenarios. – [Potential solution is to
request specific scenarios from selected
insurers as part of industry stress testing]
 Will place a strain on the resources and time
of the FSB as each submission will require
detailed analysis by the FSB.
 Smaller companies may not have the
resources and expertise to define and
establish appropriate scenarios. . – [Potential
solution is to issue separate more detailed
guidance for smaller insurers]

 Management actions are taken into account, however, the results have to be report
before and after allowing for management actions.
 Documentations of scenarios selected and the process of selecting scenarios is required
and report to the regulator.
 In addition to the position at the reporting date, the stress testing is a forward looking
exercise over a 3 to 5 year period.

6.2 Impact of the approaches on EU 3rd country equivalence

None of the approaches identified would impact on EU 3rd country equivalence.
6.3 Comparison of the approaches with the prevailing legislative framework
The current legislation allows the FSB to request stress and scenario testing, but is silent on
how the FSB should go about it. Currently the FSB requires that large insurers submit results
of economic stress tests twice a year, and that all long- and short-term insurers submit
results of economic and non-economic stress tests once a year. These stress tests are fully
prescribed by the FSB. Any new approach would therefore be in addition to the current
legislation.
6.4 Conclusions on preferred approach
Based on the research preformed the task group recommends the following approaches be
adopted by the FSB in respect of stress and scenario testing:
Macro-prudential (system-wide) stress testing

It will be difficult to pre-define industry wide stress testing to be performed by the FSB that
will be valid for an extended period of time. The systemic and industry wide risks that would
interest the FSB would change over time and be informed, amongst other things, by the
following:

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Solvency Assessment and Management: Steering Committee
Position Paper 88 (v 4) – Macro-Prudential Stress Testing

 Information provided by individual companies as part of the ORSA submissions;

 The current state and future outlook of the local and global economy; and,
 Developments in the insurance industry.
The proposal is that the FSB task an internal committee (or similar task group as this one) to
collate the information from the above sources to develop specific stress testing
requirements from time to time. These requirements would include:

 Specific level and types of stresses to be performed.

 Information requirements to allow the stress testing to be performed.
As the industry stress testing will allow the FSB to be proactive, it is important that a person
(or department) within the FSB be given responsibility to monitor the information on a regular
basis and initiate the development of updated stress testing requirements when new risks
are identified.

Micro-prudential stress testing

The task group recommends that a principle based approach be followed with no prescribed
scenarios. This is consistent with the requirement to conduct an ORSA, which includes
requirements pertaining to stress testing. Detailed principles and guidance on these
principles may be provided to the industry to inform companies as to how to go about
performing stress and scenario testing.

Way forward
In terms of micro-prudential stress testing, the stress-testing Task Group will continue
developing guidance for insurers as to how to conduct stress tests as part of their ORSA
processes.

In terms of macro-prudential stress testing, the FSB will need to develop an internal process
pertaining to system-wide stress tests to be conducted. This should take cognisance of the
stress-tested nature of the SCR, and avoid repetition of these calculations.

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Annexure A: Stress Testing across Jurisdictions – questions posed by the ST Task Group
1. What the regulator does with this information and whether the stress testing forms part of the capital calculation or
not.
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
(EIOPA = EIOPA stress testing, SST =
Swiss Solvency Test)

In carrying out the An annual solvency Does not form part of The Office of the The risk-based capital EIOPA: Not part of Capital
stress tests and testing investigation the capital calculation Superintendent of model (standard or calculation. Aim is to receive
scenario analyses, the must be performed - but rather used to Financial Institutions internal) of an insurer information on the current
firm must estimate the
and the results assess the capital (OSFI) uses the results should be vulnerability of the EU
financial resources that
it would need in order submitted in writing to calculation of the stress testing supplemented by the insurance sector to adverse
to continue to meet the the Insurer‟s Board of programs as important stress and scenario developments.
“overall financial Directors. The stress Regulator makes use information and testing in order to
adequacy rule” (i.e. a testing investigations of Risk Registers integrates the results assess their potential SST: Forms part of the risk
firm must at all times is set out in an (through stress into its assessment of vulnerability to defined based solvency capital
maintain overall Actuarial Guidance testing) as a “compare the inherent risks and extreme events. requirement calculation
financial resources, and contrast” function
Note issued by the risk controls and Where the results of
including capital to confidently identify
resources and liquidity Actuarial Society of oversight of institutions scenario and stress-
Hong Kong and it‟s areas in which the business activities. testing indicated
resources) and the
“CRR” (i.e. SCR) in the unclear whether the institution they potential capital
adverse circumstances results are submitted supervise is an outlier. Stress testing is used vulnerability, the
being considered. to the regulator. The to support capital Bermuda Monetary
Stress and scenario stress testing is not management, where Authority (BMA) would
testing does not form part of the capital rigorous, forward- be able to require a
part of the standard calculation. looking stress testing higher solvency
capital calculation. can identify severe „cushion‟.
events including a
series of compounding
events or changes in
market conditions that
could adversely affect
the institution.
2. Number of scenarios to be modelled.
UK
No minimum number
scenarios is specified.
However, a firm must carry out
stress tests and scenario
analyses for the major sources
of risk identified in accordance
with GENPRU 1.2.30 R.
Basically, this means that the
following should be considered:
 A firm must at all times
maintain overall financial
resources to ensure that
there is no significant risk
that its liabilities cannot be
met as they fall due.
 credit risk;
 market risk;
 liquidity risk;
 operational risk;
 insurance risk;
 concentration risk;
 residual risk;
 securitisation risk;
 business risk;
 interest rate risk;
 pension obligation risk ;
and
 group risk
HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
of Base scenario plus 6 The Australian Prudential OSFI does not prescribe The following categories EIOPA: 3 main scenarios
prescribed scenarios Regulation Authority the number of scenarios of scenarios were (baseline stress, adverse
plus any further plausible (APRA) does not to model. The insurers prescribed: stress, inflation stress)
scenarios identified by prescribe the number of are expected to have a
the actuary. The actuary scenarios to be base scenario that is  Economic Scenarios SST: The paper gives 14
should also consider modelled. consistent with the (3 scenarios) adverse scenarios are
insurer‟s business plan prescribed and that the
integrated scenarios  Underwriting Loss
(combining different Some of the areas that and a number of appointed actuary should
Scenarios (6
scenarios) and ripple have been subject to plausible adverse define scenarios that
scenarios – where
effects of stressing one stress testing by APRA: scenarios. These should reflect the insurer‟s
applicable)
assumption on other include non-historical
 (Re)insurer Specific
specific exposures
assumptions and  declining equity and scenarios. These adverse
asset prices Scenario (1
potential responses by scenarios should cover:
 widening credit qualitative scenario)
the regulator, the
policyholder and the
spreads
 Basic risks – Select  Worst-Case Annual
 increased market
insurer those that are relevant Aggregate Loss
volatility on the capital
Scenario (1 scenario)
position for the company. For
 Pandemics example, P&C claim  Catastrophe Loss
 Catastrophe stresses Event Analysis (1
frequency and severity
risks, premium risks. scenario)
Life mortality, morbidity  Terrorism (1
and reinsurance risk. scenario)
 Test ripple effects –  Three Other
Impact on other base Scenarios (where
assumptions. none or only some of
 Integrated scenarios – the Underwriting Loss
Scenarios apply to
Combination of risk,
usually if the probability the (re)insurer)
of an adverse scenario
is high.
3. Whether stress testing levels are prescribed or left to the company’s discretion? If prescribed what is the required
levels?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
Stress testing levels are 6 prescribed scenarios: Stress testing Prescribed. See the EIOPA: Levels
not prescribed. However, levels are not document “2010 prescribed (see Annex
in carrying out the stress  15% increase in mortality APRA already expects prescribed. STRESS/SCENARIO 2 below)
tests and scenario rates for life, morbidity insurers to have in Companies are TESTS – CLASS 4
analyses, a firm must rates and incidence rates place a process to required to test a AND CLASS 3B
identify an appropriate for disability, accident and assess their capital range of severities, (RE)INSURERS”
needs and manage their SST: Financial
range of adverse sickness; 15% decrease in including events issued by the BMA.
mortality rates for annuities capital levels. ICAAP distress scenario:
circumstances of varying capable of
equity drop by 30%,
nature, severity and  5% absolute addition or (Individual Capital generating the most
Adequacy Assessment downgrade to sub
duration relevant to its subtraction from lapse damage, whether
Process) formalises investment grade (if
business and risk profile rates determined in such a through size of loss
those requirements. company is rated),
and consider the way as to achieve adverse or through loss of
new business -75%,
exposure of the firm to result at product level reputation.
In particular, they want lapse = 25%.
those circumstances,  Interest rates down 15% insurers to assess their
including: relative; equity and Reserve scenario:
own risk profile and the
property drop of 25% over 10% increase in
 circumstances and capital needed to
3 year period support the risks they claims provisions
events occurring over a
 Interest rates up 30% undertake, and to carry
protracted period of
relative; equity and out appropriate capital
time;
property drop of 25% over projections and stress
 sudden and severe 3 year period testing
events, such as market
 High growth in new
shocks or other similar On occasions in the
business volumes of
events; and past, APRA has
min(30%; 150% of base
 some combination of assumption) requested insurers to
the circumstances and
 Low growth with year 1 conduct stress tests on
events described in (a) their business, based
sales 80% of current year,
and (b), which may on parameters specified
followed by 20% drop for
include a sudden and by APRA.
each of the next 2 years.
severe market event
No expense savings can be
followed by an
assumed
economic recession.
4. Before and after management actions allowable?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
The regulations do not The actuary may make Not addressed by Yes, management Not specified. EIOPA: Management
explicitly state whether allowance for the APRA action is allowed. actions generally not
the stress testing is Insurer‟s expected However, there is a allowed. Where used,
before or after response to adversity if specific requirement to report both before and
management actions. the Insurer can prove take into account after positions.
However, since it is practicality and constraints on
stated that the firm credibility of such management action SST: Not mentioned
must estimate the responses. The due to the stressed
financial resources that actuary needs to scenario. As such
it would need in order include details of such undue reliance should
to continue to meet the responses in the not be place on the
“overall financial report. timeliness of mitigating
adequacy rule” and the actions.
“CRR” in the adverse
circumstances being
considered, it is
implied that one has to
take into account
management actions.
5. Whether reverse stress testing is required or not?
UK HONG KONG AUS CANADA BERMUDA SWITZERLAND
Reverse stress testing is required but does not form part of the standard capital calculation. Reverse stress Yes Yes, reverse Not EIOPA: Not
testing is stress testing Specified. required
Reverse stress testing should be performed at least annually. Also, a firm must update its recommended is required.
reverse stress test more frequently if it is appropriate to do so in the light of substantial as a tool to These are SST: Not
changes in the market or in macroeconomic conditions. The design and results of a firm's determine defined as mentioned
reverse stress test must be documented and reviewed and approved by the firm's senior material risk and scenarios
management or governing body. sensitivity to that could
different challenge the
The regulator may request a firm to quantify the level of financial resources which, in the
assumptions. viability of
firm's view, would place it in a situation of business failure should the identified adverse
the
circumstances crystallise. Where reverse stress testing reveals that a firm's risk of business
institution.
failure is unacceptably high, the firm should devise realistic measures to prevent or mitigate
the risk of business failure.

In the light of the results of a firm's reverse stress tests, the FSA may require the firm to
implement specific measures to prevent or mitigate the risk of business failure where that
risk is not sufficiently mitigated by the measures adopted by the firm in accordance with
SYSC 20.2.1 R, and the firm's potential failure poses an unacceptable risk to the FSA's
statutory objectives.

No minimum number of scenarios is specified nor is the format of the reverse stress testing
prescribed. However, a firm should at least take into account each of the sources of risk
identified in accordance with GENPRU 1.2.30 (see previous section for the requirements of
GENPRU 1.2.30).

A reverse stress test is by definition a stress that tests the business plan to failure. To that
end, the firm must identify a range of adverse circumstances which would cause its
business plan to become unviable and assess the likelihood that such events could
crystallise. ) Business plan failure in the context of reverse stress testing should be
understood as the point at which the market loses confidence in a firm and this results in the
firm no longer being able to carry out its business activities.

Where tests reveal a risk of business failure that is unacceptably high when considered
against the firm's risk appetite or tolerance, the firm must adopt effective arrangements,
processes, systems or other measures to prevent or mitigate that risk.
6. Frequency of reporting?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
Stress tests and Annually; interim No concrete information can Annual reports need to Annual. EIOPA: Once off for
scenario analyses investigations must be be obtained but it is implied be submitted to the now (this is precursor of
should be carried out performed if there is a that stress testing be regulator. The annual regulations to follow)
at least annually material adverse undertaken on an annual DCAT (Dynamic
change in the Insurer‟s basis. Capital Adequacy SST: The stated stress
. circumstances. Testing) should be were only for a field test
submitted to OSFI
within 30 days of its
presentation to the
board. Initially the
DCAT was required
within 6 months of the
year-end, however,
this requirement was
changed to say that
the DCAT should be
integrated with the
business planning
process. The DCAT is
equivalent to the
ORSA requirement
contained in SAM.
7. Point in time stress testing at reporting date only or projected solvency position?
UK
Extends to both point in time
and projected solvency. A firm
must identify an appropriate
range of adverse
circumstances of varying
nature, severity and duration
relevant to its business and
risk profile and consider the
exposure of the firm to those
circumstances, including:
HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
Projected solvency Mention is made of a Requires both point in At reporting date. EIOPA: Point in time
position over period three year forecast time and forward
of 3 years; 5 years if period. looking stress testing. SST: Point in time
there are reasonable Forecast period is 5
indications that a years for Life insurers
solvency problem will and usually 3 years for
occur after 3 years. General insurers
(minimum requirement
of 2 years).

 circumstances and events

occurring over a
protracted period of time;
 sudden and severe
events, such as market
shocks or other similar
events; and
 some combination of the
circumstances and events
described in (1) and (2),
which may include a
sudden and severe market
event followed by an
economic recession.
8. Governance around the individual stress testing?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
A firm must make The solvency tests are No Formal The following principles should be adhered to: TBC EIOPA: Not
a written record performed by the Guidance can mentioned
of the stress and Actuary/Actuarial be found Have written policies and procedures
scenario testing department; followed by governing the stress testing program. Program SST: Not mentioned
records. discussions of the results should be appropriately documented.
with senior management
Infrastructure should be sufficiently robust and
before submission. The
flexible to accommodate different and possibly
report must be submitted
changing stress test at an appropriate level of
within six months of
granularity.
financial year-end. The
report must include an Regularly maintain and update stress testing
opinion on the financial framework. This should involve regular and
condition of the Insurer independent assessments of the effectiveness
signed by the Actuary of the stress testing program and the
robustness of individual components. This
assessment should be both qualitative as well
as quantitative.

It is expected that both risk management and

internal audit play a key role in the review of
the stress testing framework. It is accepted that
internal audit would be in a position to perform
an independent review of the adequacy of the
design and effectiveness of the operations of
the stress testing program.
9. Format of stress testing?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
Not specified. The report to Board of APRA already expects Part of the DCAT Stress testing to be EIOPA: Excel template
Directors is insurers to have in place report. Not aware of done on one of three completed
recommended to be a process to assess their additional stress vendor models to
interpretative rather capital needs and testing required by assist the BMA with SST: Excel template
than statistical. The manage their capital OSFI, but still need to comparability. completed
report must include levels. ICAAP formalises investigate this further. However, the
recommended actions those requirements. In (re)insurer should
for dealing with threats particular, they want inform the BMA if
to solvency identified. insurers to assess their stress testing was
own risk profile and the performed using own
capital needed to support internal model.
the risks they undertake,
and to carry out
appropriate capital
projections and stress
testing

Have not been able to

find a specific document
from APRA setting out
guidelines for stress
testing for Life and
General Insurers.
10. Group-wide stress testing used?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
Yes Not specified No reference to stress Applied on a group Not specified EIOPA: The market coverage
testing, only capital wide basis. (ie who must participate) was
adequacy and risk calculated based on gross
written premiums by solo
management.
undertakings. However,
there was not necessarily a
GPS 111 Capital
need for each undertaking
Adequacy: Level 2 identified by the national
Insurance Groups supervisors to carry out a
separate stress test. The
GPS 221 Risk stress test was conducted on
Management: Level 2 the highest level of insurance
Insurance Groups consolidation within the
(effective until 30 June European Union or EEA. This
2012) means that for the purpose of
this exercise, solo
GPS 221 Risk undertakings part of groups
which are participating in the
Management: Level 2 stress test exercise, did not
Insurance Groups have to submit individual
(effective from 1 July stress test results (but the
2012) group had to).
SST: The SST has to be
GPS 311 Audit and
done both on a legal-entity
Actuarial Reporting
level and on a group-level.
and Valuation: Level 2
Thus scenario testing is done
Insurance Groups
at group level as well.
11. The definition of financial soundness?
UK HONG KONG AUSTRALIA CANADA BERMUDA SWITZERLAND
GENPRU 1.2.26: That the assets By APRA: Capital Adequacy As per the EIOPA:
A firm must at all exceed the “The primary responsibility for Targets Minimum  Financial Soundness is defined in terms of level of own funds
times maintain liabilities and that financial safety and soundness Solvency (i.e. available capital) before and after the stress test compared
overall financial the minimum within an institution rests with its Actuarial standard for Margins as set with the Minimum Capital Requirement (MCR) in Solvency II.
resources, regulatory capital board of directors and senior satisfactory opinion: out in the The Solvency II MCR was used as a benchmark which is
including capital requirement is management. APRA‟s approach is Insurance consistent with the aim of the stress test as it is deemed to be
resources and met. to ensure that boards and
 Meet minimum Returns and the ultimate intervention threshold for regulatory purposes
regulatory capital
liquidity managers understand these Solvency whereas a breach of the SCR allows for a more flexible
requirement under the
resources, which responsibilities.” Regulations approach.
base scenario
are adequate, 1980  Swiss groups were assessed based on Swiss Solvency Test
both as to amount “Financial soundness and stability  Meet all future (amended). requirements. Swiss insurance groups calculated their
and quality, to of the authorized deposit taking obligations under the equivalent of the MCR (e.g. Threshold 3 in Circular 2008/44
ensure that there institution is ensured by providing base scenario and all SST).
is no significant continued assurance that it will plausible adverse  The direct output of the stress test was the reduction in
risk that its honour its obligations to scenarios available own funds after stress test shocks (scenarios), i.e.
liabilities cannot depositors and creditors.” own funds as of end-2010 minus the change in own funds after
Regulatory capital
be met as they fall requirement: the scenario. This was compared to the MCR. Participants
due. By RBA:
could recalculate the MCR level after the shock in each
“The Reserve Bank of Australia  P&C companies are scenario, as this would have represented their solvency
has a general and longstanding required, at a minimum, position more appropriately. However, for simplicity reasons,
responsibility for safeguarding the to maintain an MCT ratio the pre-stress MCR was the default numerator (i.e. in line with
stability of the Australian financial of 100% the best effort basis participants could opt for leaving the MCR
system. In broad terms, financial
 Regulator expects each unchanged post stress).
system stability equates to
institution to establish a
smoothly functioning financial SST: Insurers must calculate two capital numbers:
target capital level, and
markets and the absence of  Minimum solvency (statutory) is based on the statutory
maintain ongoing capital,
financial disturbances that may balance sheet. It is easy to calculate but does not reflect
at no less than the
threaten the health of the directly the insurer‟s specific risk exposures.
supervisory target of
economy more broadly. The RBA
150% Target capital (market-consistent), conversely, is risk-based and
can use its balance sheet to
grounded in a market-consistent assessment. Target capital is
support a sound financial Regulator encourages
institution facing liquidity considered as an early warning signal. While it is risk specific, it is also
active discussions
difficulties, should system stability amongst the actuary, model dependent. If target capital conditions are not met, the company
be at risk.” board and management of is not insolvent but gradual regulatory measures are initiated.
any scenarios where
minimum capital is not met
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