Stress testing is carried out on the basis of statistical data, both posted on official Internet resources and submitted by insurance organizations to the Insurance Paymentы Guarantee Fund. This structure analyzes the financial performance of each insurer participating in the insurance payment guarantee system. “Stress testing determines which insurance organizations are likely to deteriorate their financial situation and increase the risks associated with insurance activities,” explains the ARDFM press service.
The Fund developed a stochastic model shaping the probability of risk of non-compliance with prudential standards for each company of general and life insurance.
“The stress testing results are up for when calculating the rates of mandatory, additional contributions and contingent liabilities, which are calculated in accordance with the Methodology based on the financial indicators of participating insurance organizations. The results of stress testing are currently included when calculating mandatory rates on each participating insurance organization,” says Bakyt Kogulov, Chairman of the Board of Insurance Payments Guarantee Fund.
Based on the stress testing results, no sanctions are applied to participating insurance organizations.
“Based on the stress test, insurance companies that potentially cause the risk of default are identified. The stochastic model is currently being improved to study the behavior of the main parameters and solvency margin of insurance companies, taking into account external macroeconomic shocks (decrease in GDP growth, sharp increase in inflation, etc.), a pessimistic scenario. This is necessary to identify systemic risks, when the default of one company will cause a possible chain reaction on other insurance companies,” emphasizes Bakyt Kogulov.
The stress testing result are now considered when calculating mandatory rates for each insurance organization. “The higher the risk of financial instability of insurance organization, the larger is the size of its contribution to IPGF. Based on the stress testing results, the rate on mandatory contributions grew in a number of participating insurance organizations (life insurance companies). The results of stress testing indicate the presence of risks inherent in insurance organizations, but do not constitute violation of the legislation of the Republic of Kazakhstan, and therefore, supervisory response measures and (or) sanctions are not applied to insurance organizations. However, we would like to note that in case of non-payment, untimely payment or incomplete payment of mandatory or emergency contributions to the Fund, insurance organizations are subject to sanctions and supervisory response measures provided for by the Kazakhstani legislation on insurance activities,” the ARDFM press service states.
Market response
IPGF together with the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market conduct stress testing in accordance with recommendations of the International Monetary Fund. “Based on the results, the regulator can assess the level of stability of the insurance organization and apply preventive measures to companies with low capital adequacy ratios and other regulated indicators. In other words, such regular stress testing makes it possible to assess the financial stability of insurance company and prevent its insolvency in the event of negative market trends,” representatives of LIC Nomad Life shared their opinion.
LIC Freedom Life reported that they independently conduct stress testing on the risks associated with the company's insurance and investment activities on a quarterly basis. “The purpose of stress testing is to determine the stability of the company’s financial condition under various negative scenarios for further development of the situation on the insurance, stock, and foreign exchange markets within Kazakhstan and beyond (changes in market quotations of securities, fluctuations in exchange rates, regulatory requirements for insurance activities, rates and etc.). The stress testing results invariably show the company’s high financial stability, its ability to fully comply with the regulatory requirements of the ARDFM and timely fulfill its obligations to clients in any negative scenarios for development,” says Azamat Yerdessov, Chairman of the Board of LIC Freedom Life.
Nomad Insurance learned about the planned implementation of stress testing at the September IPGF Forum dedicated to the 20th anniversary of the financial organization. For IPGF part, information about the process of monitoring and assessing the risk of default, requirements for scenarios and stress parameters was not communicated to insurance companies. “However, like any other company, we are interested in increasing our financial stability. Under the conditions of crisis phenomena in the economy, the search for various ways to analyze the stability of insurance system and insurance risk assessment, the proposal of IPGF is relevant, - says Chairman of IC Nomad Insurance Dauren Imanzhanov. – We constantly conduct various stress tests, in accordance with the approved rules and regulations established by the National Bank of the Republic of Kazakhstan, which assess the potential impact on insurance company’s financial position and changes in the level of risks in the event of possible occurrence of negative internal and external economic events. The insurance market is also actively implementing the process of establishing European requirements according to Solvency II standards regarding the assessment of the adequacy of capital coverage based on the stress testing results of financial condition analysis and risk assessment.”
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