Stress Testing - October 2012

Stress Testing of the Guernsey Insurance Sector

 

In 2011 the Commission conducted and reported upon a stress testing exercise in which the 28 largest insurers in Guernsey participated.  The report published in December 2011 entitled “Stress Testing of the Guernsey Insurance Sector” is available on the Commission’s website.

 

It had been the Commission’s intention to repeat that exercise in 2012.  However, for the reasons outlined below, the Commission has reconsidered and will not now require stress testing to be undertaken this year.

 

·        The Commission is currently engaging with industry in the development of a risk based solvency framework and this involves the commitment of significant time and resources by key personnel within the industry. 

 

·         It is proposed that a quantitative impact study (QIS) will need to be undertaken in the near future in order to assess and calibrate the solvency proposals and this requires further commitment by the industry.

 

·         Many of the stress tests included in the exercise are included in the solvency proposals and will be tested as part of the QIS.  Therefore, the stress test results are unlikely to be materially different from those obtained as part of the QIS. 

 

·         Current economic conditions are not markedly different to those prevailing at the time of the last stress test and therefore the results are unlikely to be materially different. 

 

·        The Commission has undertaken a detailed review of insurer solvency based on data included in the annual returns for the year ended 31 December 2011.  This review has shown that solvency levels remain generally high with the mix of assets remaining stable. There is no evidence of any significant change in the Guernsey insurance market that would indicate a pressing requirement for updated stress tests.  Information is available on the Statistics page of the Commission’s website.

 

Whilst a formal stress testing exercise will not be conducted this year, the Commission encourages the boards of all insurers to consider whether they should conduct their own tests as part of their ORSA process.  In particular, it is recommended that a reverse stress test is conducted (to identify scenario(s) and circumstances that would result in the insurer not being viable) as this can provide valuable insight for the board of directors in assessing the risks faced by the insurer. 

 

The Commission is committed to incorporating a regular stress testing and scenario analysis regime into the overall solvency framework and will discuss further with industry in the coming months.

 

 

Insurance Division

31 October 2012