EIOPA published the second discussion paper on methodological principles of insurance stress testing. The paper covers approaches, challenges, and open points on the stress test framework on climate change, an approach to liquidity stress testing, and a multi-period framework for the bottom-up insurance stress testing. The discussion paper is part of a broader process to enhance the stress testing framework of EIOPA. The comment period for this discussion paper ends on October 02, 2020.
The section on climate change sets out methodological principles to incorporate climate change risks in a stress testing framework, which can be used when developing future EIOPA bottom-up stress test on climate change risk. The climate change section covers transition and physical risks. Given the forward-looking, long term, and exploratory nature of the exercise, the proposal is based on a step-by-step approach initiating from the assessment of vulnerability of the insurers based on their current exposures, complemented by a forward-looking assessment of the potential changes in the business models and their implications to policyholders and potential spillover to other markets. Technically, the proposed approach is based on a medium-to-long term time horizon, with end-of-modeling horizon impacts evaluated as an instantaneous shock without reactive management actions. The main challenges in modeling the transition risk are granularity of the asset classification and calibration of the shocks. Given the long-term nature of the risks, the proposed metrics are mainly based on the Solvency II balance sheet.
The section on liquidity stress testing sets out methodological principles that can be used to design stress test exercises to assess the vulnerability of insurers to liquidity shocks. It proposes a step-by-step approach starting from the micro-objective of assessing the vulnerability of the insurers to liquidity shocks, complemented by a quali-quantitative questionnaire on the potential reactions to the adverse scenario. The stress test builds over the definition of the liquidity sources and of the liquidity needs of the insurance company. The metrics are specifically designed for liquidity purposes, thus no standard Solvency II capital-based indicators are requested.
The section on multi-period framework for the bottom-up insurance stress testing aims presents, from a theoretical perspective and without the aim of completeness, the major challenges implied in the introduction of a multi-period approach in a bottom-up insurance stress test exercise. The focus on the main theoretical endeavor is the definition of the guidelines on how to treat the future business and the reactive management actions over the period of the exercise. Process-wise, the discussion covers the limitation of the process applied so far by EIOPA in its bottom-up stress test exercises and suggests a new approach based on the iterative calculation/validation process. As a final remark, the multi-period approach is considered doable but at a high cost, thus an accurate cost-benefit analysis would be requested before initiating an exercise.
Comment Due Date: October 02, 2020
Keywords: Europe, EU, Insurance, Stress Testing, Methodological Principles, Bottom-Up Stress Testing, Climate Change Risk, Liquidity Risk, ESG, Solvency II, EIOPA
Previous ArticleEC Announces Kick-Off Meeting for Cybersecurity Certification Group
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances
The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.
The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.
The Hong Kong Monetary Authority (HKMA) announced that the applicable jurisdictional countercyclical capital buffer (CCyB) ratio for Hong Kong remains unchanged at 1.0%
The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.
The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.