IA of Hong Kong Publishes Stress Testing Scenarios in Relation to ORSA
IA of Hong Kong published the prescribed scenarios for stress and scenario testing to be used by the authorized insurers conducting general insurance business. The prescribed scenarios are in line with GL21, which is the guideline on enterprise risk management. The guideline was published on July 05, 2019 and takes effect from January 01, 2020. The prescribed scenarios shall be adopted for the first Own Risk and Solvency Assessment (ORSA) report, which is required for the financial year ending on or after December 31, 2020 and for future ORSA reports until IA prescribes new scenarios. The three prescribed scenarios are the market risk scenario, the self-defined insurance loss scenario, and the largest loss scenario with largest market risk scenario.
The prescribed scenarios are designed so that a general business insurer considers the following in its ORSA report:
- Its capital adequacy in relation to risks that are not adequately reflected in its regulatory capital requirements; for example, Accident and Health accumulation risk, Hull accumulation risk, and Liability accumulation risk
- The risk, to its capital position, of two severe events or stresses happening at the same time
- The management actions it would need to take in such extreme events or stresses
Section 9 of GL21 sets out the minimum requirements for ORSA report that each authorized insurer subject to GL21 is required to prepare. Paragraph 9.5 (k)(ii) of GL21 stipulates that authorized insurers and reinsurers conducting the general insurance business, to which GL21 applies (general business insurers), should use the scenarios prescribed by the IA (Prescribed Scenarios) in their scenario and stress testing and include the results, with details of management actions and their impact and justification, in their ORSA reports.
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Keywords: Asia Pacific, Hong Kong, Insurance, Stress Testing, GL21, Enterprise Risk Management, ORSA, Capital Adequacy, Market Risk, Reporting, Scenarios, IA
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