The Bank of England’s Prudential Regulation Authority’s General Insurance Stress Test (GIST) exercise found that the UK general insurance sector is largely resilient to Solvency II regulatory scenarios, but cautioned firms to understand and account for the limitations of their catastrophe modelling.
The Bank stated; “results suggest few firms go beyond a simple loading to reflect weaknesses. Firms are encouraged to improve their ability to reflect these risks as their models evolve.
“Boards are encouraged to understand what the limitations are with the catastrophe modelling, and their inherent uncertainty when applicable, especially for their key perils.
“Specifically, the ability of firms to identify concentrations of exposures and adhere to their own risk appetite limits is an important risk management tool that should complement regular reporting of modelled loss output.”
“Many firms would benefit from being more granular in planning the management actions they would take in the event of a major loss, including reinstating exhausted reinsurance cover when appropriate.”
The PRA stress tests also showed a number of firms struggling to forecast the movements in their Solvency II basic own funds in stress scenarios, and warned the time needed for large regulatory changes to become embedded should not be underestimated, and should be properly factored in when new accounting standards are introduced.
The GIST found that concentration of risks to specific reinsurers has marginally fallen since 2015, with alternative capital remaining an important part of reinsurance panels, commenting that there’s “no evidence that the level of interconnectedness, reflected by the concentration to specific reinsurers, has increased.”
The next stress test is due for 2019.
