The results of the Australian Prudential Regulation Authority's first stress test of the general insurance sector has revealed the sector's biggest players have strong governance, but may need a better handle on the potential fallout from severe economic downturns.
The stress test of Australia's four largest direct insurers– QBE, Suncorp, IAG and Allianz –and two reinsurers was conducted in 2016, as part of an extension of the prudential regulator's focus on the banking sector and life insurance industry in the wake of the global financial crisis. APRA provided participants with a number of hypothetical stress-test scenarios to gauge preparedness, reported The Australian Financial Review.
"All participants demonstrated sound governance arrangements including strong oversight by executive board committees, and discussion and challenge of the stress-test results and mitigating actions by senior leadership teams," said APRA.
But the regulator said there was scope for improving the modelling of economic stresses.
"Recent economic downturns in Australia have not been severe when compared to the experience in other countries. This means there is limited local historical loss data available to assess and model the impact of very severe downturns on insurers' claims experience and the demand for insurance products," APRA said.
For insurers, particularly those with a global footprint, APRA said including overseas experience in their stress-testing enables them to "broaden their thinking on the potential impacts of very severe economic downturns, and not limit this thinking to local historical experience".
APRA also called out insurers' “normal" practice of assessing the capital impacts of stresses over a one-year time horizon, rather than over a number of years.
Mr Summerhayes said that APRA plans to expand participation to other players in the insurance sector, with the next stress test scheduled for 2019.