APRA's life insurance stress test results
/The Australian Prudential Regulation Authority (APRA) has offered us a glimpse into the life insurance industry's ability to endure stressors.
The thorough stress test was broad, across many diverse insurers, reinsurers, and risk specialists, and was conducted over a three-year period.
The scenario tested had impacts on liability classes of insurance, in particular disability income and total and permanent disability (TPD) cover. Some asset classes were also included, with market dips in property, equity prices, and government bond yields, and increases in credit spread.
The results
Insurers experienced significant losses and a decline in capital, but that was without any management actions in response. Capital returned to near pre-stress positions once insurers applied their strategy - that might be repricing, reducing or suspending dividends and capital injections.
The hypothetical scenario was centred around a downturn in the Chinese economy that led to a drop in global growth, resulting in an Australian recession where GDP fell by five per cent and unemployment hitting 14 per cent.
What next?
APRA member Geoff Summerhayes said in a speech to participants that the initial impact was severe, but the stress test outcomes meant with the right actions, capital positions could be restored.
Areas of concern were disability income insurance, and expectations for continued advancement of stress-testing capabilities in the risk industry.