The UK insurance industry has been put through a stress test to find out how it would respond to the largest loss in history.
This so-called ‘dry run’ project tested 28 London-based insurers and brokers on their resilience to a series of different fictional loss events, such as an unprecedented cyber attack, a highly destructive hurricane, and one of the largest falls in stock markets.
These simulated events would result in a global insurance loss of around $200bn (£160bn), which would be the biggest insurance loss ever seen.
The exercise, which took place over a two-week period, was designed to help insurers prepare for the next market-turning event, determining if they have access to the practical and financial resources to cope with such catastrophic losses.
Robert Childs, chairman of the Hiscox group which led the test, said: “We have not had a market-turning event since 9/11 and it is important we understand how one might play out in today’s trading environment.”
Where firms could have suffered large losses, we would expect a close level of interaction.Chris MoulderThe results showed that companies were able to withstand the shocks without suffering any debilitating hits to liquidity or capital.
The study also focused on whether firms would communicate clearly and candidly when so much is in disarray.
Mr Childs said: “In such an exercise it is very easy to become fixated on financial performance, but assessing solvency was not the focus of this project, which is precisely why we went further than measuring the market’s financial muscle.”
While the industry largely proved its resilience during the dry run, the test also made it clear that the framework for responding to catastrophes needs to change, particularly as the market dynamics have altered since the last market-turning event in 2001.
The white paper outlined lessons which can be learnt in light of the project, saying companies should:
• Create crisis management training programmes
• Ensure a well-tested response is in place
• Have clear plans for raising extra capital after a market-turning event
Chris Moulder, director of general insurance at the Prudential Regulation Authority, welcomed the exercise, saying it allowed PRA to test its own processes and coordination with other stakeholders, such as Lloyd’s, HM Treasury and the Financial Conduct Authority.
He also said the exercise emphasised the importance of communication between firms and regulators, particularly after an event when uncertainty is likely to be greatest.
“Where firms could have suffered large losses, we would expect a close level of interaction so they could explain how they plan to rebuild their financial position within an acceptable time frame.
“We stand ready to discuss with firms their current thinking on how they might do this so that we can understand their proposed approaches and ensure our expectations are clear.”
Alan Lakey, partner at Highclere Financial Services, said this exercise seemed like a good idea, particularly as an insurance company failure would have almost as much of an impact as the collapse of a major bank.
"It is good to read that the industry has survived such scrutiny," he said.
Mr Lakey added however that while the life assurance side is easy to assess, general insurance is less so, which he said Lloyds members have found to their cost.
katherine.denham@ft.com
