After conducting a series of stress tests, Australian regulator the APRA has concluded that re/insurers in the country are “well-positioned” to withstand a very severe economic downturn.
The tests looked at the 21 largest life re/insurers in Australia, including 14 direct insurers and seven reinsurers, covering 90% of the sector by grow written premium (GWP), and four active mortgage insurers (LMIs).
They 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’s stress tests of LMIs and LIs featured two separate severe downturn scenarios, both including continued COVID-19 outbreaks within Australia leading to recurring Stage Three and Four restrictions, ongoing international border closures, and sharp contractions in economic activity over a three-year period.
The results indicate that despite significant losses of capital under a severe economic downturn, both the LMI and life insurance industries as a whole remained above their minimum capital requirements, while still meeting their commitments to policyholders.
However, the outcomes of the stress test were highly variable across both industries, with some individual insurers falling below their minimum capital requirements.
Among the key reasons for insurers’ falling capital levels during the stress were large investment losses for insurers with exposures to lower-rated investments and deteriorations in disability income insurance claims and credit quality of underlying mortgages insured.
Notably, however, these results are before any benefits that insurers would derive from management actions to respond to the stress, which would help to mitigate stress and help capital levels return to pre-stress levels, APRA says.
Capital injections provided by parent owners, capital raisings, repricing and reductions in new business were used by most insurers to mitigate the impacts of the stress.
But while individual actions appeared credible in isolation, APRA noted that few insurers considered the feasibility and second-order impacts of these actions in the context of a broader industry-wide stress, particularly when other market participants are likely to be using similar actions to rebuild capital levels.