According to Financial Services Authority, life insurers could survive a recession that assumed a 15 percent drop in property prices in 2009.
“A 15 percent fall in property values is already inadequate,” said Tony Silverman, a London-based analyst at Standard & Poor’s Equity Research, who has a “sell” rating on six European insurers, including Aviva Plc. “There will be arguments that the 1980s’ model is not the right one to use.”
This is the worst economic recession UK is facing since 1958. AVIVA, Prudential Plc and Legal & General Group Plc (The UK’s three biggest insurers) fell to their lowest in at least 18 years in March. The insurance industry is following banks to seek new capital.
The main objective of stress tests is to identify financial firms that my require taxpayer funds or need to raise capital. The Financial Services Authority requires banks and insurers to stress test regularly their own balance sheets.
However the insurance industry remains in a strong position. the stress tests undertaken by the FSA were applied to institutions that were fully able to cope,” said the Association of British Insurers in an e-mail today.
“Stress tests take place all the time and are a useful tool for firms’ risk management,” said a spokesman at Aviva.
Recovering signs appears
There are some economic recovering signs: the average cost of a home rose 0.6 percent to 227,864 pounds ($372,000) after falling 0.4 percent in June, said the operator of the U.K.’s biggest residential property Web site, Rightmove Plc, yesterday.
In the four quarters through March 2009, the economy shrank 4.2 percent, according to the Office for National Statistics, and economists expect output to keep falling through much of this year. Unemployment was 7.1 percent in the first quarter, the highest level since August 1997.
The Financial Services Authority’s parameters for insurers included interest rates rising or falling by 50 basis points, and credit spreads widening by 50 basis points. Equity prices dropped by 20 percent under the model. A basis point is 0.01 percentage point.
“The stress tests used are not forecasts of what the FSA thinks is likely to happen; 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,” the FSA said.
Parameters Change
The Financial Services Authority said the insurance stress-test model is different from the one used for banks. The time- frame was also different: while banks were examined using changes in value measured from peak to trough over five years, insurers were tested on changes that would occur over 12 months.
The London-based regulator said it wouldn’t release results for specific insurers and that its parameters for further tests would change.
That differs from the U.S., where the Federal Reserve in May released the results of stress tests showing that 10 lenders needed to raise a total of $74.6 billion.
