AN OVERVIEW OF THE SENSITIVITY TESTS DISCLOSED IN FIRMS’ SFCRS
Insurers are required to disclose specific information regarding their risk profiles in their SFCRs. Firms typically include details of stress and sensitivity testing performed on major risk areas and provide commentary on the financial impacts.
All 100 insurers referenced stress and sensitivity testing in their SFCRs, however, the level of detail disclosed varied significantly between firms.
In its “Consultation paper on proposals for Solvency II 2020 review” dated 25 June 2019, EIOPA noted that “an important gap identified in the SFCR was the lack of comparability of the information to be provided regarding the sensitivity of the SCR”. EIOPA proposed to require that insurers disclose the results of a standardised set of sensitivity tests in their SFCRs, to improve the comparability of information across insurers. EIOPA recommends 13 standardised tests, covering economic and non-economic assumptions.
From our sample of insurers, we found that there continues to be a lack of consistency across insurers on the level of detail provided. Only 63% of firms provided detailed results on the sensitivity testing that they have performed. Of these firms, 65% showed the impact of their sensitivity testing on their eligible own funds ratio, which is the metric that EIOPA recommend insurers disclose.
In total, there were 528 sensitivity tests carried out across the 63 firms that disclosed the testing results, equating to, on average, approximately eight tests per insurer.
Number of tests by key risk area
This chart shows the number of tests carried out across the market by key risk area.
Market risk continues to be the risk area where insurers performed the most tests, followed by underwriting risk. This is broadly consistent with EIOPA’s proposed recommendations where 10 out of the 13 tests involve testing economic assumptions such as equity markets, interest rates, credit spreads and real estate values.
Included in these tests are scenarios on emerging risks where some insurers have disclosed the potential impact of scenarios on climate change, cyber risk and COVID-19, assigned to their respective risk area.
Number of tests on emerging risks
This chart shows the number of tests carried out across the market relating to these risks. We have identified tests as being related to these risks if firms specifically mentioned them in their stress testing. Other firms may have conducted tests that are indirectly related to these risks, but did not specifically mention them in their stress testing.
Of the firms that disclosed the results of sensitivity tests on emerging risk areas, most performed tests on the potential impact of COVID-19 or climate change. The number of tests performed in these areas are still small, however, in the context of the uncertainties and potential risks that these risks bring to insurers.
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