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Home > Prudential Regulation Authority > Supervisory activities - Stress testing
 

Supervisory activities - Stress testing

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This page includes updates and information on stress and scenario testing, and reverse stress testing.

Updates

May 2016: EIOPA stress testing

EIOPA launched the 2016 insurance stress test package on Tuesday 24 May and opened its central Question and Answer (Q&A) process. Scenario data is due to be returned to the PRA for validation purposes on or before Friday 15 July.
 
More information on the stress tests and timescales can be found on EIOPA’s website (see External Links).
 

April 2016: EIOPA stress testing

In April, EIOPA announced its invitation to industry stakeholders to provide feedback via a consultation process to elements of its proposals for the 2016 stress test exercise linked to methodologies to analyse and disclose results, and reporting templates.

15 February 2016: EIOPA announces Europe-wide insurance stress tests for 2016

In February 2016, the European Insurance and Occupational Insurance Authority (EIOPA) announced its plan to hold Europe-wide stress tests in 2016.  The 2016 EIOPA stress tests will be a quantitative and qualitative exercise aimed at assessing the resilience and vulnerabilities of the EU insurance sector to a combination of adverse market risk scenarios in the persistently low interest rate environment.  The EIOPA exercise is planned to cover those firms most vulnerable to these types of stress.  

The PRA has contributed to the development of the EIOPA stress tests. It is currently considering the likely firms to which it would apply, whilst taking into account other activities being undertaken by firms this year. Supervisors will be in touch later in 2016 Q1 to invite firms to participate in this stress test.

EIOPA’s timeline for the stress tests includes the following key dates:

• May 2016 (mid to late) Launch of exercise
• July 2016 (early to mid) Submission deadline for participants to National Competent   
  Authorities
• December 2016  Publication of EIOPA’s report

More information on the stress tests and timescales can be found on EIOPA’s website (see External Links).

21 October 2015: Bank of England publishes its approach to stress testing the UK banking system

October 2015: General Insurance Stress Testing 

In July 2015 the PRA sent a request to the UK’s largest general insurers to participate in a stress test exercise (see July 2015 update below). The deadline for submission was 1 October 2015 and the PRA thanks all insurers that were requested to participate in this exercise for their submission.  The review and analysis of the submissions has started;  the PRA may be in touch with individual firms to seek clarification on specific aspects. In the first half of 2016, the PRA expects to hold a seminar to provide feedback on this exercise – more details to follow early next year.

28 September 2015: Bank of England announces the timetable for publication of the 2015 UK stress testing results 

July 2015: General Insurance Stress Testing

In July 2015 the PRA sent a request to the UK’s largest general insurers to participate in a stress test exercise.  These stress tests have been designed to complement the ongoing work of the PRA in assessing the resilience of UK insurers and in monitoring how insurers are developing their Own Risk and Solvency Assessment.  This work ensures that insurers consider the impact that an adverse stress event could have on the safety and soundness of their business and the implications for policyholder protection.   In addition, they provide an overview of the UK industry’s reliance on specific counterparties and jurisdictions under stressed conditions.
The stress tests cover a wide range of events from natural catastrophes in Europe and North America, through to potential adverse claims relating to cyber and supply chain disturbances.
Participating firms are required to respond by 1 October 2015. 
More information
The spreadsheet for the stress scenarios and accompanying notes are available below. (Note that the scenarios are for stress testing purposes only, and should not be interpreted as a forecast or an indication of the PRA’s outlook.)
 

December 2014: EIOPA Stress Testing

On 1 December 2014, in response to EIOPA’s announcement of the EU-wide insurance stress test 2014, Andrew Bailey, Deputy Governor, Prudential Regulation and CEO of the PRA, said:

“We welcome the completion of the 2014 EIOPA stress test exercise, which complements the ongoing work of the PRA in assessing the resilience of UK insurers. This work ensures that insurers consider the impact that an adverse stress event could have on the safety and soundness of their business and the implications for policyholder protection. We will take forward the EIOPA recommendations which apply to UK insurers with the relevant firms in the coming months." 


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Stress and scenario testing

Firms use stress and scenario testing to consider the potential impact of certain adverse circumstances on their business – is an important element in firms’ planning and risk management processes, helping them to identify, analyse and manage risks. Firms should develop, implement and action a robust and effective stress testing programme that assesses their ability to meet capital and liquidity requirements in stressed conditions, as a key component of effective risk management. All firms should undertake relevant analysis, commensurate with the nature, scale and complexity of their business.

The Prudential Regulation Authority (PRA) also runs its own stress tests on a periodic basis for a number of firms. It does this regularly for specific high-impact firms and for other firms as the need arises, to assess their ability to meet minimum specified capital levels throughout a stress period. System-wide stress testing is also undertaken by firms using a common scenario for financial stability purposes. To support its framework, the PRA sets policy for firms' stress testing requirements, sets stress scenarios and monitors test results.

Reverse stress tests

Banks, building societies, insurers and some BIPRU investment firms are also required to undertake ‘reverse stress tests’.

Reverse stress tests are stress tests that require a firm to assess scenarios and circumstances that would render its business model unviable, thereby identifying potential business vulnerabilities. This differs from general stress and scenario testing, which tests for outcomes arising from changes in circumstances.  A firm's business model is described as being unviable at the point when crystallising risks cause the market to lose confidence in the firm.

Reverse stress testing is primarily designed to be a risk management tool, encouraging firms to explore more fully the vulnerabilities and fault lines in its business model, including 'tail risks', and to explore potential mitigating actions.

The PRA works with counterparts in the EU and internationally on approaches to stress testing.

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