Guidance Notes for Licenced Insurers on Resilience Testing (November 2021)

Summary

This is a guidance note from the Guernsey Financial Services Commission explaining when and how licensed insurers should carry out resilience testing of their assets against their liabilities. It applies to both long-term (life) and general insurance business and sets out the rationale for testing, suggested assumptions, and expectations around governance of the testing process.

• Purpose: Resilience testing is meant to identify and minimise exposure to loss arising from a mismatch between an insurer's assets and its liabilities, since a perfect match is rarely achievable.
• When testing may not be needed: Insurers writing short-tail general business settled shortly after being incurred, and holding matching short-term investments such as bank deposits, may reasonably decide resilience testing is not appropriate.
• Assumptions: Assumptions used should be realistic but large enough to reveal the impact of significant market movements, for example equity value swings of plus or minus 25% or interest rate moves such as plus 4% or minus 2%, and changes in the shape of the yield curve or in inflation.
• Response to a mismatch: Where testing reveals a mismatch, the insurer should assess its capital position and consider establishing a specific mismatching reserve to ensure minimum solvency requirements can still be met if market conditions change.
• Governance: The resilience testing basis should be incorporated into the company's internal guidelines on asset/liability mismatching and reviewed regularly in light of changing market conditions and changes in the risks or business underwritten.

The note does not prescribe a fixed methodology, leaving insurers discretion to tailor testing to the nature of their business and risk profile, but expects the approach to be documented, monitored and kept current.

Key obligations

• Licensed insurers should carry out resilience testing appropriate to the nature of their business and the risks underwritten, unless a close asset/liability match or short-tail, short-term investment strategy makes it unnecessary
• Where resilience testing reveals a mismatch, the insurer should consider its capital position and consider establishing a specific mismatching reserve to ensure minimum solvency requirements can be met if market conditions change
• Insurers should incorporate the basis for resilience testing into their internal guidelines on acceptable asset/liability mismatching
• Insurers should review the resilience testing basis on a regular basis in line with changing market conditions and changes in risk or business profile

Applies to

licensed insurers (long-term insurance business), licensed insurers (general insurance business)