On 14 May, EIOPA released the specification for its 2018 Insurance Stress Test exercise. Unlike the 2016 exercise which assessed solo insurers, this year’s exercise considers insurance groups. Participants have been pre-selected by EIOPA, comprising 42 insurance groups which includes the 30 largest groups and in aggregate represent approximately 78% of the overall European insurance market (based on consolidated group assets).
Detailed reporting, under each of a base and three stress scenarios, must be submitted to the group’s local supervisor by 16 August 2018. Following local supervisory review, these reports will be submitted to EIOPA in mid-September 2018, with EIOPA planning to release its report in the second half of January 2019.
Scenarios to be tested
There are three scenarios - two market related risks and a natural catastrophe risk.
The two market stresses are:
For all of the base and yield up/down scenarios, the key information required from groups is:
The natural catastrophe scenario is based on a range of different natural perils to which Europe is exposed, covering four windstorm events, two Italian earthquakes and two central and eastern European floods, all of which are assumed to occur in a narrow timeframe.
A new addition to previous stress tests is the inclusion of a questionnaire on exposure to cyber risk. This aims to assess both potential vulnerabilities, arising from both own cyber threats and cyber insurance, and existing approaches to managing these risks, with a view to identify both best practices and the potential risk to financial stability.
A significant change that has surprised some insurance groups is that EIOPA plans to make some information public, not just at an aggregate level, but also at an individual group level. While the EBA has published company specific information for a number of years, this will be the first time insurance groups will find themselves in this position.
EIOPA has stated that group-specific information will only be published with the consent of the insurance group, which it intends to collect in late October. However, it is unclear what the response will be if insurers deny this consent.
The individual disclosures would include the balance sheet impacts of the various long-term guarantees (LTG) measures (including matching adjustment, volatility adjustment and transitional measures under the base and stress scenarios.
While the public solvency and financial condition reports (SFCR) already disclose the impact of reducing any matching or volatility adjustment to zero and a quantification of the impact of not applying the transitional measures, the extension to disclosing this information under stressed scenarios will be new public information.
While EIOPA emphasises that the stress test is ‘not a pass-fail exercise‘, there is a risk that some readers could misinterpret this as a sign of potential weakness – especially if the stressed situation without the various LTG measures results in an SCR coverage ratio below 100%.