EIOPA published a paper that sets out the main methodological elements, principles, and guidelines for an EU-wide stress testing exercise for insurers. The document will serve as a tool-box to inform and facilitate the design and execution phases of the EIOPA stress testing exercises. This methodological paper, which has been published post a stakeholder consultation, is part of a general enhancement of the EIOPA approach to stress testing from methodological and operational standpoints.
Supervisory stress tests can be implemented through a top-down or bottom-up approach. This paper focuses on bottom-up or institution-run supervisory stress tests. The paper describes the micro- and macro-prudential objectives and approaches for stress tests, elaborates on the scope of a stress test exercise, covers scenario design, considers the calibration and application of specific shocks, and discusses the approaches to data collection and validation of the stress test results. The paper specifies requirements for data reporting and emphasizes that the set of templates used to report the results under the baseline and stressed scenarios should be as close as possible to the Solvency II QRT. The information requested in the stress test may be quantitative or qualitative.
Additionally, a reduction in the frequency of the EU-wide stress test exercises to a three-year cycle is expected to allow proper follow-up analyses of the stress test results and to better develop and follow-up on the recommendations issued. Between two stress test exercises, EIOPA will conduct focused sensitivity analyses and assessments of specific exposures through top-down and/or bottom-up approaches, thus reducing the burden on the industry. EIOPA plans to issue an additional paper on specific topics related to stress tests, such as the assessment of liquidity positions under adverse scenarios, the assessment of positions against transition and physical risks stemming from climate change and the potential approaches to multi-period stress tests.
Stress tests can provide additional insights and forward-looking perspective on the risk and vulnerabilities of insurers that cannot be derived from the regular Solvency II reporting. EIOPA conducts regular EU-wide stress test exercises for the insurance sector, in collaboration with ESRB. Currently, the methodology for EIOPA stress tests is specified separately for each exercise in technical specifications. Given the complexity involved in conducting EU-wide stress tests for insurers, having a set of pre-determined common methodological principles and guidelines can significantly facilitate the stress testing process. Therefore, EIOPA has developed this guide to serve as a tool-box to inform and facilitate the design and execution phases of the EIOPA stress testing exercises.
Related Link: Methodological Principles for Stress Testing
Keywords: Europe, EU, Insurance, Stress Testing, Methodological Principles, Solvency II, Systemic Risk, Bottom-Up Stress Test, Reporting Template, EIOPA
A well-recognized researcher in the field; offers many years of experience in the real estate ﬁnance industry, and leads research efforts in expanding credit risk analytics to commercial real estate.
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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