Premium Financing Backtesting Software (stress-testing premium financed life insurance)

provides instructions for completing the PRA’s Life Insurance Stress Test
(LIST
We have changed the specification:
• The use of a staged approach for the scenario, and setting out the permitted
management actions at each stage, is designed to achieve greater consistency and
will more readily enable the PRA to identify differing approaches across firms.
We have redesigned the data reporting requirements:
• The amount and granularity of data captured in the quantitative templates has been
reduced.
We have added a request for additional quantitative and qualitative details that will inform our
view of a firm’s stress test governance and risk management:
• In addition to the quantitative templates, firms are asked to provide a “Results and
basis of preparation” (RBP) report. Each firm is required to set out in the RBP report its
governance process and quality assurance in completing this exercise, as well as to
provide a narrative around the results, including the conclusions, limitations, data or
modelling issues and its approach to validation of the results.
• Firms are also asked to provide information on management actions, liquidity
resources and Equity Release Mortgages (ERMs) through the scenario stages.
For completeness, the overall structure of the documents provided is as follows:
• this document provides the instructions for completing the quantitative templates
the quantitative templates specify the nature and structure of the numerical information
that needs to be provided for each stage of the scenario; and
• the requirements for the RBP report document sets out the qualitative information that
firms will need to submit
Assess sector resilience to severe but plausible adverse scenarios: For life
insurers, we are focussing on the consequences of severe disruption in financial
markets, affecting both rates and market liquidity, followed by an additional longevity
shock.
2. Guide supervisory activity: The process of stress testing yields valuable information
about a firm’s vulnerability as well as modelling and risk management capabilities. For
example, it might highlight shortcomings in proxy modelling capability, or excessive
reliance on liquidity in particular financial markets. We will follow up any such findings,
if material, in our assessment of key risks of firms and in setting supervisory priorities
and work plans.
3. Enhance the PRA’s and firms’ ability to respond to future shocks (support
capacity building): The information we gather enhances the PRA’s ability to run
desk-based analysis of new shocks and be better prepared to assess sector resilience
and respond in the event of similar scenarios occurring. Aggregating responses to
questions about management actions will allow the PRA to plan better to mitigate the
collective, systemic impacts of such actions, and will support firms in understanding
the potential market implications of their decisions.