Proposed amendments to the Recovery and Restructuring of Credit Institutions and Investment Intermediaries Act, effective as of 14 August 2015 (“Recovery and Restructurings Act”) provide that stress tests should be carried out for insurers and reinsurers. If approved by the Parliament, the changes will necessitate the organising and performing of stress tests for insurers and reinsurers within a tight timeframe, by the end of 2016.
Performing of stress tests for both banks and insurers was included in the recommendations by the European Commission. Initially, the Bulgarian Recovery and Restructurings Act envisaged stress tests only for the banks in Bulgaria (in addition to the assets quality review of the banks) and only review of the assets of pension funds, respectively review of the balance sheets of insurers. The proposed amendments now envisage stress tests to be carried out for insurers and reinsurers as well.
Particularly, the proposed amendments provide that the Financial Supervision Commission (“FSC”), as the competent supervisory authority for the non-banking financial sector, should assign to an independent party the development of methodology for stress tests for insurers and reinsurers and the stress tests should be carried out by the end of 2016. While the results from the review of the balance sheets of the insurers are expected to be announced on 1 December 2016, this will allow only 1 month till the end of 2016 for the stress tests to be completed. The expenses for organizing and carrying out the stress tests will be on the state budget.
The way that the amendments to the Recovery and Restructurings Act were introduced raises certain concerns, as follows:
- The tight timeframe for organizing and carrying out the stress tests may affect their quality. Unlike the stress tests for banks which took more than a year to be organized, there is only six months for organizing and performing the stress tests for the insurers, during which term the following procedures should take place: to adopt the legislative amendments concerning the stress tests, to appoint a contractor who will develop the methodology for performing the stress tests, to develop quality and objective methodology which should give realistic results for the stability of the insurance sector and to carry out the stress tests.
- There are discussions on who will be subject to the stress tests: (i) the insurance companies (the license holders) individually; or (ii) the corporate group of each insurer as a whole. Furthermore, it is important to confirm what criteria will be used as this will have an impact on the results of the stress tests. A more comprehensive review will give more detailed and transparent information on the stability of the insurers.
- The proposed amendments to the Recovery and Restructurings Act coincide with the planned change of the panel of the regulator. The mandate of the chairman of the FSC expired in June 2016 and the procedure for appointment of a new chairman of the FSC has been delayed. There are speculations that the mandate of the existing chairman of the FSC will be extended to monitor and supervise the completion of the stress tests in the insurance sector by the end of 2016.
By way of a reminder, since 1 January 2016 Bulgaria has a new Insurance Code which implements the new capital and risk management requirements applicable to insurance and reinsurance companies under the Solvency II Directive.