UK insurers criticise Bank of England's stress test

The UK insurance industry has asked the Bank of England's regulatory arm, the Prudential Regulation Authority (PRA), to review its live crisis simulation, arguing the exercise carried a heavy reporting burden, used unrealistic scenarios and pushed firms to their "absolute limits."

In its first three-week "dynamic" stress test in May, the PRA subjected insurers to a sequence of crises in quick succession: an earthquake on the US West Coast, a hurricane in the Gulf of Mexico, a windstorm in the UK, flooding in Europe and a cyber incident.

Nafisah Hussain, public policy director at the International Underwriting Association (IUA), the trade body representing insurers and reinsurers in the London market, said the IUA had shared its views with the PRA. Hussain said it was "extremely unlikely" for scenarios to stack up within such a short timeframe. Speaking to Reuters, Hussain warned that repeating similar tests on a regular basis "could create an excessive burden," adding that "the information regulators can draw from these results, at least from a policy standpoint, is limited."

Known as DyGIST, the test differed from previous stress tests, which measured how insurers respond to shocks specified in advance, by disclosing scenario details only during the live exercise and testing firms' ability to respond in real time. Industry sources said insurers told the PRA that the test put serious strain on internal resources, with some firms forced to bring in technical experts at short notice and cancel staff leave, and that what was asked of them went beyond expectations.

Sue Dreksler, head and partner of KPMG UK's general insurance actuarial team, said: "We don't think they will run the test again, at least not in this form."

Stress tests are a widely used tool for regulators around the world to gauge how well financial institutions can withstand various shocks. Participation was limited to firms selected by the PRA that represent 80% of the UK general insurance market; for those firms, DyGIST was not a voluntary sector-wide exercise but part of the regulator's supervisory programme.

The PRA said the exercise measured "the sector's dynamic response and resilience to different shocks spread across three weeks" and was "designed to explore additional areas beyond a traditional stress test."

Some parts of the industry backed the new dynamic test. Paul Davenport of the Lloyd's Market Association said risk managers viewed the live element as "a genuinely useful exercise."

The regulator said it would publish its findings by the end of the year and would take feedback on resource use and proportionality into account as part of its post-exercise review.