Session: PD-2 - Update on OSFI Stress Testing and Draft DCAT Educational Note

Transcription

1 Canadian Institute of Actuaries Institut canadien des actuaires Seminar for the Appointed Actuary September 23 24, 2010 Le Centre Sheraton Hotel Montréal, Québec Colloquepour l'actuaire désigné Les 23 et 24 septembre 2010 Le Centre Sheraton Hotel Montréal,, Québec Session: PD-2 - Update on OSFI Stress Testing and Draft DCAT Educational Note Speaker: Nadine Gorsky, OSFI

2 OSFI Stress Testing Agenda Guideline E-18 Life Standardized Stress Test Standardized Stress Test Results OSFI Response E-18 Self-Assessments 2

3 Guideline E-18 December 2009 O.S.F.I. s expectations with respect to use of stress testing by all federally regulated financial institutions Improvements needed for DCAT and stress testing in insurance companies Harmonized with principles of Basel Committee s May 2009 guidance on stress testing 3

4 Guideline E-18 Key Principles: Embedded in ERM Actionable Results Integral part of capital and risk management Senior management and Board engagement 4

5 Guideline E-18 Supervisory Considerations: Does a company s stress testing fulfill those principles? e.g. Scenarios consistent with risk appetite and business circumstances Frequency/timing supports timely management action Complements DCAT 5

6 Guideline E-18 Supervisory Considerations cont.: Commensurate with company size Includes severe shocks, prolonged downturns, reverse stress testing Impact assumed from possible management actions Timing of Board reporting 6

7 OSFI Life Standardized Stress Test Purpose of Standardized Test Scenarios: Analyze market-wide risk exposures in a jurisdiction or globally Assess resilience of each insurer to similar stresses or scenarios (benchmarking) Note that other company specific stress test may be required by OSFI to assess adequacy of target capital level. 7

8 OSFI Life Standardized Stress Test Objectives of 2010 Standardized Stress Test include: Probe systemic vulnerabilities on integrated basis Focus on severe market, credit and mortality risks Assess feasibility/reasonableness of proposed management actions Provide insurers with stress considerations for their own risk management Better focus supervisory attention 8

9 OSFI Life Standardized Stress Test Testing Approach: 24 life insurers participated Similar exercises performed for P&C and deposit-taking FI s 5 year projection period Several parameters were stressed enough to make significant differences, as follows: Equity market performance Real estate performance Interest rate levels Credit default experience Mortality experience Some degree of non-performance by reinsurers 9

10 Life Standardized Stress Test Results Both measures (MCCSR and earnings) show steady growth under the base (i.e. most likely) scenario. Performance is worse, especially in years 1 and 5 under the OSFI scenario. Even when management actions ( ma ) are included, performance is significantly worse than Base. Common management actions are: dividend reductions, reduced sales (mainly UL, seg funds, annuities), increased premium rates for new and (where possible) existing business 10

11 Life Standardized Stress Test Results Key Observations: Exposure to equity market risk (segregated funds) Exposure to low interest rates (Universal Life and Term insurance products) The impact from high claims activity due to pandemic experience (writers with high mortality exposure) Insurers without access to external capital are particularly at risk in a stressed environment 11

12 OSFI Response Focussed supervisory attention on certain results that appeared as outliers (benchmarking) Some examples of issues raised with specific companies as a result: Canadian capital allocation for companies without access to external capital Reinsurance arrangements for companies with high mortality exposure 12

13 E-18 Self Assessments Also one-on-one conversations with OSFI Most common gap identified is the lack of consolidation of various risk management policies into a comprehensive ERM framework Documentation was a large issue. Pieces of stress testing procedures were documented, but not all Also need for growing role of Board in terms of defining risk appetite 13

14 E-18 Self Assessments Cont. DCAT remains key stress testing exercise; but stress testing (mostly confined to sensitivity testing) is increasingly used in other areas such as capital and risk management Ad-hoc scenario testing under-utilized, so there remains, in our opinion, a need for more frequent stress testing on an enterprise-wide basis Liquidity stress testing is not yet an industry wide practice 14

15 Stress Testing A financial institution s Stress Testing program should be able to identify for senior management, board, regulators and other stakeholders the specific vulnerabilities that it may face in case of certain exceptional but plausible events, along with risk management actions that it may consider initiating to mitigate these vulnerabilities. 15