Featured Product

    EIOPA Publishes Discussion Paper on Insurer Stress Testing Framework

    June 24, 2020

    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.

     

    Related Links

    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

    Featured Experts
    Related Articles
    News

    APRA Updates Validation and Derivation Rules in September 2020

    APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.

    September 24, 2020 WebPage Regulatory News
    News

    EC Proposes Frameworks for Crypto-Assets and Operational Resilience

    EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.

    September 24, 2020 WebPage Regulatory News
    News

    ECB Publishes Opinion on Proposals to Amend Securitization Framework

    ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.

    September 24, 2020 WebPage Regulatory News
    News

    FCA Consults on Regulation of International Firms in UK

    FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.

    September 23, 2020 WebPage Regulatory News
    News

    MAS Amends Notice on Capital Adequacy Requirements of Banks

    MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.

    September 23, 2020 WebPage Regulatory News
    News

    FCA to Begin to Move Firms to New Data Collection Platform RegData

    FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.

    September 23, 2020 WebPage Regulatory News
    News

    ISDA Expects IBOR Fallbacks to be Effective by End of January 2021

    ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.

    September 23, 2020 WebPage Regulatory News
    News

    APRA Reviews Repayment Deferral Plans, Identifies Best Practices

    APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.

    September 22, 2020 WebPage Regulatory News
    News

    ESAs Assess Risks to Financial Sector After COVID-19 Outbreak

    ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.

    September 22, 2020 WebPage Regulatory News
    News

    BoE Confirms Withdrawal of COVID Corporate Financing Facility

    BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.

    September 22, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5836