Insurance stress test points to nat cat modelling weakness

The General Insurance Stress Test (GIST) conducted by the UK’s Prudential Regulation Authority (PRA) suggested weaknesses in the natural catastrophe modelling of insurers.

The scenarios included in the stress test were designed, in part, to test risks that are either absent or not well captured in catastrophe models, such as flooding from rain associated with hurricanes or tsunamis following earthquakes. Results suggest few firms go beyond a simple loading to reflect weaknesses, the PRA noted. 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.

In addition, for some firms, the stress test identified areas for improvement in the way accumulations of exposures are captured, monitored and reported to the board. 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, according to a PRA statement.

Furthermore, the PRA said that 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. In addition, firms would benefit from considering asset liquidity, capital fungibility and strengthening their resolution planning.

The 26 largest general insurers in the UK, 16 large syndicates and the Society of Lloyd’s, participated in the General Insurance Stress Test 2017. Between them, they accounted for some £80 billion of gross written premium (GPW), representing approximately 82 percent of the UK general insurance sector by GPW, and held some £61.5 billion of eligible own funds (EOF) as at Dec. 31, 2016. The stress test included four natural catastrophe scenarios and an economic downturn scenario. In addition, GIST 2017 contained a separate section capturing the insurance exposures of UK general insurers to the different sectors of the UK economy.