What Happened When Amjad Sabri’s Dead Body Came to His House
High quality global journalism requires investment.
Europe’s biggest insurer has hit out at regulators’ latest plans for EU-wide stress tests, calling them “half cooked”.
Tobias Buecheler, head of regulatory strategy at Allianz, told the Financial Times that although insurance stress tests made sense in principle, the scenarios in the latest exercise would not produce a meaningful result.
Eiopa, the EU’s pensions and insurance regulator, launched its stress tests last month. They will examine how insurers fare in different scenarios. The results will be published in December, but insurers cannot pass or fail the tests and there will be no need for them to recalculate their solvency positions.
The tests will use two scenarios: a prolonged period of low rates and a short term shock involving hits to both the equity and fixed income markets.
Allianz’s concern is with the protracted low-rate scenario. The tests assume that the so-called ultimate forward rate an interest rate used to assess the current value of very long-term liabilities will fall from 4.2 per cent to 2 per cent. The lower the rate, the higher the current value of liabilities.
“Economically you wouldn’t see such a severe drop in the ultimate forward rate,” says Mr Buecheler. “Solvency ratios could go down substantially, especially without considering transitional measures used by some insurance companies. They need to make it clear to the market that it is a freak stress situation.”
He also questioned the need for such a severe stress test just months after the introduction of the new Solvency II capital regime. “We’re concerned about a spanner in the works from the stress tests. It doesn’t make sense to do a stress test of the Solvency II framework at this point in time.”
Eiopa defended the tests, saying that they would allow supervisors to test threats to financial stability. “Given that underwriting risks are not tested in this exercise, the market risk scenarios are designed to be severe enough as a response to the challenging macroeconomic environment we are currently observing,” the regulator said.
“Such scenarios represent a low probability event. At the same time their likelihood cannot be fully ruled out. By having severe shocks, we can better see the issues requiring particular supervisory attention and response to the potential build-up of systemic risks at the European level.”
Allianz is also worried that the results of the tests could be used by the European Systemic Risk Board, whose job is to spot risks to the financial system across the EU, to force the insurance industry to hold an extra layer of capital. The insurer says it could be tough to find a good return on that capital, and that in any case an extra buffer would not serve a useful purpose.
“Historically in a crisis scenario the insurance industry has acted as a stabiliser. The business model is a volatility dampener. If you have a macro prudential buffer, there is a high chance that you could mess this up,” said Mr Buecheler.
Courtesy : ft.com