The Australian Prudential Regulation Authority (APRA) has released the results of its stress-testing activities on insurers during the COVID-19 pandemic.
Last year, the pandemic resulted in traditional, emerging, new, and non-financial risks. As a result, APRA conducted several stress-testing activities on 21 large life insurers (including 14 direct insurers and seven reinsurers), four active lender mortgage insurers, and 18 large general insurers (including 15 direct insurers and three reinsurers) to help them strengthen their resilience to severe but plausible downturns.
For life and lender mortgage insurers, APRA designed and featured two separate severe downturn scenarios – both including continued COVID-19 outbreaks in Australia, leading to recurring stages of restrictions, ongoing international border closures, and sharp contractions in economic activity over three years.
Lender mortgage insurers' tests featured gross domestic product (GDP) contracting 10%, unemployment levels increasing by 10%, and house prices dropping by 30% – driving higher levels of claims. Meanwhile, life insurers faced GDP contracting 15%, unemployment rising to over 13%, and significant claims deterioration. Both tests also featured plummeting asset prices, prolonged low bond yields, and rising credit spreads – hitting their balance sheets.
According to APRA, the stress tests of lender mortgage and life insurers indicated that they were well-positioned to withstand severe economic downturn, remaining above their minimum capital requirements while still meeting their commitments to policyholders despite significant losses of capital.
However, some individual insurers fell below their minimum capital requirements due to:
Read more: APRA releases latest claims and policies statistics
APRA also assessed general insurers' internal stress-testing capabilities to identify how they could enhance their capital management practices and improve their resilience to adversity.
Throughout the assessment, the general insurers developed and used internal stress test scenarios that were severe enough to respond to the stress via management actions, but were not sufficiently severe to test the limits of their capital adequacy.
APRA found that a lack of severe-enough stress scenarios limited several general insurers' effective testing of key recovery options on the emergence of stress.
APRA will continue its program of targeted stress testing activities on regulated institutions, subject to macroeconomic and emerging risks. It will also seek industry feedback on new guidance for entities on stress testing.
“In doing so, APRA aims to enhance the insurance industry's stress-testing capabilities, as well as APRA's own ability to promote the stability of Australia's financial system,” APRA said in a statement.
