Stress testing insurers during Covid-19
The Australian Prudential Regulation Authority (APRA) conducted a series of stress testing activities on life and general insurers during the pandemic in 2020
During 2020, APRA completed its assessment of internal stress testing capabilities of the 18 largest general insurers to identify how they could enhance their capital management practices and improve their resilience to adversity. This assessment included 15 direct insurers and three reinsurers (covering 80 per cent of the sector), focusing on areas of governance, scenario design and usage of stress testing in capital management.
The differing severity between the stress tests reflects the different times during 2020 that these exercises were conducted, reflecting a continually evolving view of severe downside risks throughout a period of rapidly changing economic outlooks.
Insurers able to withstand severe downturn
The results of APRA’s stress tests indicate they are well-positioned to withstand a very severe economic downturn. Specifically, the results indicate that despite significant losses of capital under a severe economic downturn, the industry remained above their minimum capital requirements, while still meeting their commitments to policyholders.
Importantly, however, these results are before any benefits that insurers would derive from management actions to respond to the stress. After deploying management actions to mitigate the stress, capital levels return towards pre-stress levels.