Gloomy scenarios to assess the resilience of U.K. insurers turned into reality within weeks of the tests being carried out earlier this year, casting doubt on their usefulness.
In February, the U.K. Financial Services Authority asked insurers to detail how they would cope if stocks plunged 20% between Jan. 1 and Dec. 31, property values dropped 15%, credit spreads widened 50 basis points, and interest rates rose or fell by 0.50%.
“The stress tests are not forecasts of what the FSA thinks is likely to happen,” the FSA said Tuesday. “Their purpose is to consider whether an insurer would be able to sustain adequate financial resources under conditions, which, at the time the stress is conducted, are considered unlikely to arise.”
But by early March, three of those four parameters had come to pass, though stock prices and credit spreads have since recovered to around January levels.
U.K. property prices have been roughly flat, while U.K. interest rates have been cut 1.5% since the start of the year, to 0.50% on March 5.
Results of the tests weren’t released. The statement was made after a request under the Freedom of Information Act.
Regulators throughout the world have been conducting regular stress tests on banks, insurers and other financial institutions, to make sure they have enough capital to withstand collapse under various scenarios.
An FSA spokesman said the tests give only a snapshot of a particular point in time, “to give us a better understanding of the position of the firm.”
“It’s a continuum process, and both we and the firms will continue to look at various forms of stress testing,” he said.
The regulator has also declined to disclose the results of stress tests it conducts on the country’s banks. In May, it said it had “greatly increased” its use of the tests, and said it has started to challenge banks more on the results.
In those tests, it has been looking at peak-to-trough indicators, such as a drop of more than 6% in gross domestic product and a 50% decline in house prices.
Company Web site: http://www.fsa.gov.uk
