On 23 March 2011, the European Insurance and Occupational Pension Authority (EIOPA) announced the launch of a second European-wide stress test for the insurance sector which will take place between now and the end of May 2011. It also published a framework document setting out the specifications for the test. This announcement follows the completion of the first European-wide stress test in the insurance sector, the results of which were published in March 2010.
The stress test is conducted in cooperation with the relevant national supervisory authorities, including the Swiss Financial Market Supervisory Authority (FINMA) and the European Systemic Risk Board (ESRB) and is aimed at obtaining information on the current vulnerability of the European insurance industry to adverse capital market developments, using the requirements of Solvency II as a gauge. In other words, the stress tests will look to assess whether the European insurance sector can meet minimum capital requirements even after applying well defined stress scenarios. It is one of a number of supervisory methods used for monitoring the stability of individual institutions and for evaluating the insurance sector generally. The stress test also provides vital information on the capital positions of insurers and insurance groups in adverse situations.
A minimum of 50% of insurance companies from each country, split between life and non-life, will participate in the test based on statutory gross written premiums per country. However, to the extent that a solo undertaking, which is part of a group which is participating in the stress test exercise, has been identified by the national supervisor to carry out a stress test, that solo undertaking does not have to submit an individual stress test result. The impact of three different stress scenarios or shocks will be tested based on 2010 financial results:
- baseline scenario, defined as severe stress;
- adverse scenario, defined as a more severe market deterioration; and
- inflation stress which assumes an increase in inflation, forcing national supervisory authorities to rapidly increase interest rates.
In developing the stress test, EIOPA applied similar macroeconomic assumptions to those that were applied to the banking sector stress test. A best effort principle will apply to the 2011 stress test since the test is based on a yet to be finalised future Solvency II regulation. Undertakings will be permitted to use reasonable approximations and proxies where necessary.
EIOPA has requested that participating insurance companies report their results to their national supervisors by 31 May 2011 and hope to publish the aggregated results of the stress test in July 2011.