The Australian Prudential Regulation Authority (APRA) has released the results of its first comprehensive stress test of the life insurance industry, conducted in 2015.
The results of APRA’s 2015 Life Insurance Stress test were formally announced by APRA member Geoff Summerhayes to the representative mix of diversified insurers, reinsurers, and risk specialists who participated in the stress test at APRA’s head office in Sydney.
The participants were subjected to an adverse scenario over a three-year period.
The hypothetical scenario was designed using economic parameters based on a downturn in the Chinese economy which led to a dip in global growth and a recession in Australia, with GDP falling by 5 per cent and unemployment rising to 14 per cent. The scenario impacted liability classes, particularly disability income insurance and Total and Permanent Disablement, as well as asset classes with severe downturns in property and equity prices and government bond yields, and an increase in credit spreads, APRA explained.
Without allowing for management intervention to the scenario, insurers experienced significant losses and material decline in their capital. Capital was returned to near pre-stress conditions, however, once insurers implemented specific mitigation strategies, including repricing, a reduction or suspension of dividends, and capital injections, APRA reported.
“Overall, while the initial impact of the scenario itself was severe, the stress test outcomes demonstrated that with reasonable management actions the industry participants could restore their capital positions,” Summerhayes said.
“The stress test did shine a light on areas of concern, such as disability income insurance and the need to address problems with this product in the near term. It also reinforced and set expectations for continued advancement of stress-testing capabilities in the life insurance industry.”
“The community expects financial institutions to be there to support them in good times and – particularly in the case of insurance – bad. It is a foundation of community trust and confidence that the insurance sector is able to meet its commitments at the time when they are most needed,” he said.
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