Stress Testing and scenario analysis for life insurers
APRA has positioned the ICAAP as a key component of each regulated entity’s capital management framework.
Amongst the various requirements of the ICAAP is the need for insurers to undertake stress testing of their risk exposures in order to evaluate the impact of exceptional but plausible events. Whilst stress testing cannot precisely capture the nuances of real events, it offers significant value in terms of modelling tail risk, communicating and refining the Risk Appetite Statement, and improving general preparedness for adverse events.
In August 2013, we met with a number of life insurers to gain some insights into how the industry is responding to the new stress testing requirements within the ICAAP and where is the industry at in terms of implementation. In the attached document we summarise our findings from industry consultation, provide an overview of stress testing techniques, describe a stress testing framework, and share some examples of stress testing scenarios relevant to life companies.