UK insurers urge Bank of England to rethink 'dynamic' stress test

By Phoebe Seers and Annabel Tinson

LONDON, Sept 17 (Reuters) - Britain's insurance industry is urging the Bank of England's regulatory arm to rethink its live crisis simulation, citing heavy reporting demands and unrealistic scenarios in a stress test that pushed firms "to their absolute limit".

The Prudential Regulation Authority's first "dynamic" stress test, which ran over three weeks in May, subjected insurers to successive crises including a U.S. West Coast earthquake, a Gulf of Mexico hurricane, a UK windstorm, European floods and a cyber event.

"The accumulation of scenarios in such a short time frame was very unlikely," said Nafisah Hussain, director of public policy at the International Underwriting Association, a trade body for insurers and reinsurers in the London market that has fed its views back to the PRA.

Speaking to Reuters, Hussain warned it might be "overly burdensome" to run similar tests regularly.

"There is only so much that regulators would be able to infer from those results, from a policy perspective, at least," she said.

INDUSTRY PUSHBACK

Unlike previous stress tests that assessed how insurers would handle predefined shocks, this one - known as DyGIST - tested insurers' ability to respond in real time to adverse conditions as they unfold, with scenario details revealed only during the live exercise.

Insurers have told the PRA the tests put significant pressure on their internal resources, with some firms forced to bring in technical experts at short notice and cancel staff leave as it became clear what was being demanded of them exceeded expectations, industry sources said.

"We don't think they'll run it again, or certainly not in this form," said Sue Dreksler, partner and head of KPMG UK’s general insurance actuarial team.

Stress tests are a common tool used by regulators globally to assess financial institutions' ability to withstand various shocks.

Participation was limited to firms selected by the PRA, representing 80% of the UK general insurance market. For those firms, DyGIST formed part of the regulator's supervisory programme and was not a voluntary industry-wide exercise.

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

Some in the industry, however, backed the new dynamic test. Paul Davenport at Lloyd's Market Association said chief risk officers found the live element "a really useful exercise."

The regulator will publish its findings by year-end and said it considers feedback on resourcing and proportionality as part of any post-exercise review.