Stress Test (Stresstest)

Concept

A stress test examines, using a hypothetical, exceptionally adverse scenario – such as a sharp decline in interest rates, a capital market crash, or an unusual accumulation of large losses – how an insurer’s own funds, liquidity, and solvency ratio would develop under those conditions. Unlike a sensitivity analysis, which considers the isolated effect of individual parameter changes, a stress test typically combines several adverse developments simultaneously into a consistent overall scenario.

Supervisory and Internal Stress Tests

In addition to regular, EU-wide coordinated stress tests conducted and evaluated by the supervisory authority for the entire insurance sector to detect systemic risks at an early stage, insurers are required, as part of their own risk management system, to conduct company-specific stress tests tailored to their individual risk profile and the risk factors material to the undertaking.

Relevance for ORSA and Capital Planning

Stress tests form a central component of the Own Risk and Solvency Assessment (ORSA), as they show management whether existing capital resources remain adequate even under conditions significantly more adverse than expected; the results are regularly incorporated into strategic capital and business planning as well as into the setting of risk tolerance limits.