Supervisory Information Circular – Stress Testing for Insurers (2023-06-28)

Summary

This is a CIMA Supervisory Information Circular dated 28 June 2023 that provides guidance to insurers on how to conduct stress testing, a risk management technique already mandated by Section 5.3.2 of the Authority's Rule on Risk Management for Insurers. The circular does not create a new legal rule itself but explains the Authority's expectations for how licensed (re)insurers should design, govern and execute stress testing and scenario analysis programs, and it supplies example stress scenarios (economic downturn, catastrophe, pandemic, and mortality/longevity events) tailored to Class A insurers versus Class B(iii) and D reinsurers writing commercial reinsurance.

The guidance applies to all categories of insurers licensed by CIMA to conduct (re)insurance business.

General Principles

• Tailored framework: Each insurer should tailor its stress testing framework to its own risk profile.
• Board approval: The board of directors should approve scenarios and assumptions.
• Senior management role: Senior management should ensure all risk areas are considered.
• Business dimensions examined: Specific business dimensions should be examined, including solvency, lines of business, market position, group position, investment policy, business plan, and reinsurance ceded.
• Technical mechanics: A baseline 'null impact' scenario should be used for comparison, and year-end Annual Return Filings data should be used as the data source.

Supervisory Review Process

• Review and challenge: CIMA may review and challenge an insurer's stress testing framework, scenarios and assumptions.
• Corrective action: CIMA may require corrective or remedial action plans where results reveal weaknesses.
• Increased frequency: CIMA may require more frequent submission of stress testing results.

Detailed appendices provide illustrative shock tables and example multi-factor scenarios (e.g., hurricane, earthquake, pandemic, economic downturn, longevity event) with specific shock percentages for insurers to consider when building their own scenarios.

Key obligations

• Insurers must conduct quantitative and qualitative stress tests and scenario analysis appropriate to their size, complexity and risk exposures, per the Rule on Risk Management (Section 5.3.2), which this circular elaborates on.
• An insurer's board of directors should approve the scenarios and assumptions used in stress testing, and senior management should ensure all areas of risk are considered when conducting the tests.
• Insurers must consider solvency position, lines of business and distribution systems, market position, group position, investment policy, business plan, and reinsurance ceded when performing stress tests.
• Insurers should include a baseline 'null impact' scenario as the first scenario in their stress testing exercise for comparison purposes.
• Insurers should perform stress testing on a regular basis (annually or biennially) and whenever there is a material change in the insurer's book of business.
• Insurers must use year-end data (i.e., data from their Annual Return Filings submitted to the Authority) as the source data for stress testing.
• Insurers may be required by the Authority to submit stress testing results more frequently if directed to do so.
• Insurers may be required to undertake a corrective or remedial action plan if the Authority identifies negative implications from stress testing results.

Applies to

insurers (all categories licensed by CIMA to conduct (re)insurance business), Class A insurers, Class B(iii) insurers carrying on reinsurance business, Class D insurers carrying on reinsurance business

Deadlines

• annually or biennial: Insurers should perform stress testing on a regular basis, either annually or biennially, and whenever there is a material change in the insurer's book of business.