The Australian Prudential Regulation Authority (APRA) has conducted a series of ‘stress tests’ on Australia’s life and general insurers to determine whether the COVID-19 pandemic has impacted on their financial situation.
According to APRA, the test revealed the insurers to be “well-positioned to withstand a very severe economic downturn while still meeting their commitments to policyholders”.
APRA said it conducted several stress tests with the 21 largest life insurers (LIs); four active lenders mortgage insurers (LMIs); and the 18 largest general insurers (GIs).
“These stress tests used scenarios based on significantly worse macroeconomic outcomes than the RBA’s (Reserve Bank of Australia) August 2020 Downside Scenario, and were designed to assess insurers’ resilience to further deteriorations in macroeconomic conditions, and the actions they would take in response, both individually and collectively,” APRA said.
“The results of APRA’s stress tests of LMIs and LIs indicate they are well-positioned to withstand a very severe economic downturn,” it said.
“Specifically, the results indicate that despite significant losses of capital under a severe economic downturn, both the LMI and LI industries as a whole remained above their minimum capital requirements, while still meeting their commitments to policyholders.”
APRA said the outcomes of the stress test were highly variable across both industries, with some individual insurers falling below their minimum capital requirements.
The Authority said the key reasons for insurers’ falling capital levels during the stress were large investment losses in insurers with exposures to lower-rated investments and significantly higher claims costs.
“Importantly, however, these results are before any benefits that insurers would derive from management actions to respond to the stress,” it said.
“After deploying management actions to mitigate the stress, capital levels return towards pre-stress levels.”
APRA said it expected stress testing to form an integral part of insurers’ approach to capital, crisis and risk management, and most insurers were able to clearly show how stress testing outcomes informed their capital settings.
It said the tests reinforced APRA’s view that there was room to improve stress testing capabilities across the insurance industry, and it expected insurers to continually self-assess their own internal stress testing frameworks in light of the findings.
APRA said it would continue its program of targeted stress-testing activities on regulated institutions, subject to macroeconomic and emerging risks.
