The stress test included a representative mix of diversified insurers, reinsurers and risk specialists who were subject to an adverse scenario over a three-year period, APRA said in a statement.
The scenario impacted liability classes, in particular disability income insurance and total and permanent disablement (TPD), as well as asset classes with severe downturns in property and equity prices and government bond yields, and an increase in credit spreads.
Without allowing for management actions in response to the scenario, insurers experienced significant losses and a material decline in their capital. However, capital returned to near pre-stress positions once insurers factored in their particular mitigation strategies which included repricing, a reduction or suspension of dividends and capital injections, APRA said.
The economic parameters for the hypothetical scenario were based on a downturn in the Chinese economy leading to a decline in global growth and a recession in Australia, with GDP falling by 5 per cent and unemployment increasing to 14 per cent.
In a speech to test participants at APRA’s head office in Sydney today, APRA member Geoff Summerhayes said that while the overall initial impact of the scenario itself was severe, the stress test outcomes showed that with reasonable management actions the industry participants could restore their capital positions.
“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,” Mr Summerhayes said.
“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,” he said.
“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.”
Keen to get a better understanding on the extent of the “repricing” mitigation strategy if APRA cares to elaborate. Geoff, I’m glad you were part of this exercise. Gives me some confidence that the stress testing was vigorously executed.