Recently revealed tests to explore the resilience of insurers to external shocks are likely to succeed – or fail – on the data that the under-scrutiny firms possess.
Data will be a central ingredient on the tests detailed last month by the Prudential Regulation Authority (PRA), which oversees the industry. In its most recent communique, the PRA detailed the design and timing of its Dynamic General Insurance Stress Test (DyGIST), which have been created as risks associated with cyber-attacks, climate change and market volatility are expected to rise.
The tests, to be held in May next year, will comprise live exercises during which firms will be presented with a set of hypothetical adverse events over three weeks to which insurers must respond as if they were real. The PRA will require detailed analyses of responses. Results will be announced as the tests progress and will go on to inform the regulator’s supervisory plans.
The exercises, which will be held alongside a similar test for life insurers, will expect firms to have their data in order to respond adequately, a stipulation that could be an opportunity to the insurance industry to boost its IT capabilities, said Wenzhe Sheng, senior product manager for EMEA prudential regulation at Clearwater Analytics.
“The Prudential Regulation Authority’s design of the DyGIST framework provides a strong foundation for ensuring the resilience of the insurance sector,” Sheng told Data Management Insight. “Moreover, it provides insurers with an incentive to fortify their data infrastructures and implement data driven risk management practices.”
Banking Assessments
The stress tests were announced last year and follow similar exercises focused largely on the UK’s banking industry. They will be carried out to gain a deep understanding of the insurance industry’s solvency and liquidity buffers and to examine the effectiveness of their management response to adverse scenarios.
The PRA held workshops with the Association of British Insurers, the Lloyd’s Market Association and the International Underwriting Association to devise the design and timing of the tests. Professional services giant Deloitte said last week that the bank tests had shown that insurers should prepare for their own assessment by ensuring their data is in order.
“General insurers need to enhance their stress and scenario testing processes to be able to perform the exercise live – including ensuring they can aggregate relevant data and identify potential management actions to deploy for any given scenario,” it said in a report.
Earlier Experience
The importance of having good data in responding to new risks was highlighted in similar stress tests held three years ago by the Bank of England to assess the resilience of insurers and lenders to climate risks. Initial exercises conducted by organisations including AXA, Allianz and AIG revealed concerning failures in data preparedness, which left some struggling to complete the tests, and surfacing gaps in critical datasets.
Clearwater’s Sheng said it is imperative that insurers have their data estates ready.
“In order to pass the first phase of the test – a live exercise that test’s a firm’s preparedness for adverse market-stressed events – it’s imperative that insurers have the capability to quickly pull up a very clear and transparent view of all of their holdings under these scenarios,” he said. “This is not as common as you would expect, as insurers are increasingly investing in a wide range of assets, which means they are often dealing with very different types of data in their internal systems.”
Sheng warned, however, that the DyGIST could also highlight shortcomings in firms’ data setups.
“When it comes to risk management you need to have a real-time understanding of your risk exposures in order to respond and manage that risk,” he said.
Reason for Hope
He is optimistic that insurance firms will be able overcome the challenges, thanks to the availability of new innovations and that “can provide daily, validated, and reconciled investment data on their entire portfolio, so that they can properly understand their market exposure across asset classes”
“Those who choose to invest in such modern data infrastructures will be best prepared to demonstrate their solvency and liquidity resilience and their effectiveness in risk management practice under the DyGIST regulatory exercise,” Sheng said.
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