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Stress tests

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According to Article 267 of the Insurance Supervision Act 2016 (VAG 2016; Versicherungsaufsichtsgesetz 2016) the main objective of insurance supervision is the protection of policyholders’ and beneficiaries’ interests. To achieve this objective, the FMA may, in accordance with Article 273 VAG 2016, develop quantitative tools to assess whether insurance and reinsurance undertakings are able their obligations even in difficult economic situations. Stress tests, which are conducted by the FMA on a regular basis constitute one such instrument for undertakings. In a stress test insurance and reinsurance undertakings are required to simulate their business performance in particularly unfavourable scenarios. Such scenarios may include sharp declines in the capital markets, (natural) catastrophes or significantly increased costs. On the basis of such scenarios defined by the FMA or the EIOPA, the FMA may estimate to what extent insurance and reinsurance undertakings are able to permanently fulfil their obligations, even in adverse situations. Where applicable the supervisor may require individual undertakings to take measures to increase their resilience.

The FMA regularly conducts stress tests to analyse the risks and vulnerabilities in the insurance sector especially with regard to the current economic climate as well as for assessing the risk capacity of the individual insurance undertakings. In this case the effects of a low interest environment that prevails for a long period of time, a sharp increase in interest rates (combined with a broadening of the credit spread) as well as the effects of variously market events are tested and variously liability-side shocks simulated.

During the liquidity stress test the quantitative effect of various volatility adjustment mechanisms on the calculation of technical provisions and solvency are investigated and evaluated to see whether the assumptions, methodologies and parameters that constitute the basis for the market risk module, adequately depict the long-term nature of insurance business. The aspects of illiquidity and/or the duration of insurance obligations may subsequently be applied to recalibrate the volatility adjustment.

The Solvency II Directive (2009/138/EC) covers several Long Term Guarantee (LTG) measures, which have an effect on different aspects of solvency calculation. Some of these measures are mandatory for undertakings, others may be used voluntarily, but in some cases may only used subjected to approval by the FMA. The Solvency II Directive requires LTG measures to be reviewed annually (see esp. Article 77 et seq. of the Directive). The FMA conducts various reviews on behalf of the EIOPA, in which the effect of changes to individual measures is tested. During this review, EIOPA is required to inform the European Parliament, the Council and the European Commission about the effect of the LTG measures in the respective individual Member States.

Under the Solvency II regime, field studies are conducted in relation to the calculation of the future Solvency Capital Requirement. The field study primarily focuses on testing the adequacy of the proposed calculation method, to check its practicability, and then on the basis of the results to make adaptations. It is therefore particularly important that insurance undertakings participate in field studies, to be able to depict the situation specific to the individual undertaking and subsequently the national situation.
Here you can find further information about the individual field studies:

QIS 1

The first Solvency II field study for the calculation of technical provisions was conducted in late 2005. The calculation of technical provisions was tested in accordance with the Best Estimate plus risk margins approach and compared against the current level of provisioning. Furthermore, the practicability of the proposed calculation method was also tested.

Results

During the first Solvency II field study the current calculation of provisioning was compared with the potential future valuation of technical provisioning. EIOPA (previously CEIOPS) published the results in the QIS 1 Summary Report.

QIS 2

During the second Solvency II field study the calculation of the standard formula for the Solvency Capital Requirement (SCR) as well as the calculation of the Minimum Capital Requirement (MCR) was tested. Furthermore, the calculation of technical provisions was also addressed. QIS 2 took place from May to August 2006.

Results

Since QIS 2 was the first attempt at calculating the SCR using the standard formula and the MCR, due to the lack of comparability and the large degree of leeway in the calculation of data, it was decided not to publish the figures in detail. EIOPA (previously CEIOPS) summarised the results in the QIS 2 Summary Report.

QIS 3

During the third field study, which took place in 2007, data was also analysed for insurance groups for the first time. EIOPA (previously CEIOPS) published the results in the QIS 3 Summary Report.

QIS 4

The fourth investigation took place from April to July 2008. The actual adaptations in the standard formula for calculating the SCR were tested.

Results

The FMA published the Austrian results in the national report.

EIOPA (previously CEIOPS) presented the results during a stakeholder meeting

QIS 4.5

In 2009, the FMA provided insurance undertakings in Austria with the option to participate in a national quantitative field study (QIS). Since on a European level, the European Commission’s QIS 5 was only planned for 2010, the possibility was to be offered in 2009 for undertakings to prepare themselves efficiently for future requirements.

Solvency II and especially the new rules on own funds present material challenges for governance and risk controlling. The FMA allowed insurance undertakings the possibility to participate in order to ensure compliance by the insurance undertakings with the legally prescribed requirements from 2012.

Results

The results of the national quantitative field study were published in January 2010 in the QIS 4.5 Results Report for Austria.

QIS 5

The European Commission conducted the fifth Quantitative Impact Study (QIS 5) during the second half of 2010 with the European Supervisory Authorities (ESAs) as part of the implementation of the new supervisory regime in the insurance sector (Solvency II).

It was the European Commission’s declared objective to analyse the quantitative impacts of the new rules during QIS 5 for one last time prior to the implementation of Solvency II. The FMA, as the national supervisory authority, cooperated closely with the European institutions implementing the new regime, and placed particular focus on the specificities of the Austrian insurance market in conducting QIS 5.

Results

A national report of the results of QIS 5 was published by the FMA in May 2011. The effects of the planned regulations on the Austrian insurance industry were presented and analysed in detail in this comprehensive report of results. Particular attention is paid to the technical provisions, the capital base and the composition of the risk profile of the insurance undertakings.

EIOPA published a report on QIS 5 for Solvency II.

QIS 6 and the 2014 Stress Test

The effects of particularly adverse market developments as well as underwriting events (such as natural catastrophes, increased mortality) were tested during the 2014 EIOPA Stress Test. Due to the economically challenging situation and in order to determine the status of preparations of insurance undertakings in regard to the introduction of Solvency II , the FMA decided to instruct all Austrian insurance undertakings to participate in the national stress test (QIS 6). During the analysis of the stress test, EIOPA published an analysis report.