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Barnett Waddingham
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GIST 2017 - are we all stressed out?

Published by Cherry Chan on

The PRA’s General Insurance Technical Head of Department, Stefan Claus sent out a letter in April 2017 requesting approximately 25 mostly category 1 & 2 firms (and a small number of category 3 firms) to participate in the General Insurance Stress Test 2017 (GIST 2017).  What we would like to explore in this short blog is what the remaining insurers can potentially learn from GIST 2017?
General Insurance Stress Test 2017

Letter from the PRA’s General Insurance Technical Head of Department, Stefan Claus

Background

GIST 2017 is broadly split into two sections.  The first section consists of four pre-defined natural disaster events and one economic downturn event.

The four natural disaster events range from UK windstorm and flood events to earthquakes and hurricanes in the US/Canada. 

The economic scenario considers an adverse impact on assets, underwriting losses which are associated with an economic downturn and a reserving shock. 

The second section is data gathering exercise which we will discuss later in this blog.

So what can we learn?

The first thing that stands out is that the PRA obviously place a lot of value on stress and scenario tests when assessing the riskiness of an insurer.  This is understandable since certain stress and scenario tests can be very informative to both insurer and the PRA.  Therefore insurers should aim to produce a range of realistic stress and scenario tests which can help demonstrate that senior management are aware of the key risks faced by the firm. 

What is just as interesting to the PRA, if not more, is the management actions that could be taken if an event or sequence of events take place.  Likewise, factors like pre-emptive triggers, which alert management of a pending event, are also likely to be of interest to the PRA.

Insurers should aim to produce a range of realistic stress and scenario tests which can help demonstrate that senior management are aware of the key risks faced by the firm.

Out of the four natural catastrophe scenarios, the one likely to be of interest to most insurers which underwrite UK risks is the “Severe winter season with two severe windstorms across the South East of the United Kingdom and Northern Europe combined with two floods in the United Kingdom” scenario.  It is understandable why the PRA has specified such an event given the increased frequency of floods and windstorms due to climate change.  Whilst insurers are likely to already be considering flood and windstorm risk to their portfolio; there may also be merit in considering more regional specific events where an insurer has material exposure.  For example, any consequential losses related to fracking or spontaneous appearance of a sinkhole in a region where the insurer has material exposure.

The economic scenario considers an adverse impact on assets, underwriting losses, which are associated with an economic downturn and a reserving shock.  Other insurers  who are not part of GIST 2017 may still find it useful to carry out this economic scenario and analyse the impact on their portfolio.  For example, deterioration in fraud and theft losses will be relevant for most insurers and for all classes.  The paper mentioned other considerations such as D&O claims, this can be easily substituted by public liability claims if it is deemed more suitable for your firm.

Capturing exposures

The purpose of the second section is to capture exposures and provide the PRA with a map of where firms’ and industry exposures lie across both property and liability by sector.  The scope of this section is strictly in respect of UK policyholders and for UK risks, and limited to direct commercial business only. 

The PRA acknowledges that there are currently limitations in specifying a liability scenario.  This information collection exercise will allow them to understand the sectoral accumulations, assist the PRA’s preparedness in the event of a significant loss and likely to be used to develop future market-wide liability stress tests.

Firms will need to provide the number of policies, gross written premium (GWP) and total limits exposed through their different products offered by each sector of the economy, using the traditional Standard Industrial Classification (SIC) grouping. 

The PRA will feed back to the industry our summary of the exposures by high-level sector classification.

Although there will be limitations in this exercise and the PRA is fully aware of these, the PRA would like firms to better understand their liability accumulations and bring all firms closer to an industry best practice. 

Conclusion

Stress and scenario tests should not be thought of as an activity to keep the PRA happy; instead, they should be seen as an opportunity to demonstrate good risk management both internally and externally.  Exercises such as GIST 2017 provide an opportunity for a firm to take stock and revisit questions such as;

  • What are the material risks to our business both today and in the near future?
  • What would we, the management team do if a particular stress or scenario test materialised?
  • What exposure do we have by sector across the property and liability business?
  • What other liability or property scenarios are more suited to our business?

About the author

  • Cherry Chan

    Cherry advises a range of UK general (re)insurance companies and international captives on actuarial issues including statutory reserve reviews, reinsurance and insurance programme optimisation and Solvency II implementations. She also acts as Actuarial Function to a number of clients.

    View Biography

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