13 July 2015 Insurance

PRA asks insurers to stress test disaster events

UK regulator, the Prudential Regulation Authority (PRA), has asked the UK’s largest general insurers to participate in a stress test exercise.

The tests are designed to assess the resilience of UK insurers and monitor how insurers are “developing their own risk and solvency assessment”.

The stress tests cover a wide range of events from natural catastrophes in Europe and North America, through to potential adverse claims relating to cyber and supply chain disturbances.

Scenarios include synchronous terrorism events, European windstorm and flood and US hurricane events.

One of the scenarios asks insurers to stress test for a synchronous set of three terrorism events in London, New York and a third city of the firm’s choice, each using a two ton bomb dissimulated in a medium sized box van.

Insurers are expected to provide separate gross estimates for each terrorism event and estimate the benefit of recoveries from Pool Re, from the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) 2015 and from any other government or pool provided cover or from any reinsurance purchased. The insurer must also quantify the net loss to the firm.

For each stress test firms are required to provide details of the expected reinsurance recoveries split by reinsurers, and their expectation of the likelihood of such an event.

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