July 22, 2019

EIOPA published a discussion paper on the methodological principles for stress testing the insurance sector in EU. The discussion paper sets out methodological principles and guidelines required for the conduct and assessment of an EU-wide insurance stress test exercise. In this paper, the key elements addressed by EIOPA include stress test process and objectives, scope of stress tests, scenario design of a stress test, shocks and their application in a stress test, and data collection and validation. The comment due date for this discussion paper is October 18, 2019.

In a supervisory bottom-up stress test, which is an exercise run by a supervisor or a regulatory authority, participating institutions are requested to calculate the impact of the prescribed shocks on their balance sheet and capital requirements, according to the provided guidance and by using their own models. The principles and guidelines set out in this discussion paper will be the toolbox to facilitate both the design and execution phase of the future EIOPA stress test exercises. The discussion paper is part of a broader process to enhance the stress testing framework. In this context, EIOPA will work on other related issues such as the assessment of liquidity positions under adverse scenarios, assessment of the vulnerabilities toward climate-related risks, and the potential approaches to multi-period stress tests.

EIOPA is required to conduct regular EU-wide stress test exercises for the insurance sector, in collaboration with ESRB. As part of the regular stress testing exercise, EIOPA is tasked with developing common methodologies for assessing the effect of adverse economic and financial scenarios on the insurance sector in EU, for application by national competent authorities. For each exercise, EIOPA can tailor specific elements of stress testing according to the market conditions and their potential negative implications for insurers. This paper is part of a general enhancement of the EIOPA approach to stress testing from a methodological and operational standpoint. Additionally, a reduction in the frequency of the EU-wide stress test exercises is under consideration, to allow proper follow-up analyses of the stress test results and to better develop and follow-up on the recommendations issued. 

 

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Comment Due Date: October 18, 2019

Keywords: Europe, EU, Insurance, Stress testing, Methodological Principles, Solvency II, Systemic Risk, EIOPA

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