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PRA stress tests don’t go far enough: Hiscox

The Prudential Regulation Authority (PRA)'s stress test for insurers doesn't go far enough in showing how carriers will cope with extreme scenarios, according to Hiscox chairman Robert Childs.

Commenting alongside the London-listed insurer's results this morning (27 July), Childs said that there needed to be a detailed practical "dry run" of how a serious catastrophe may play out involving all London market players, including the PRA and Lloyd's.

"It is nearly 14 years since the September 11 attacks, and I think it is more important than ever to test how our market would handle another major calamity," he said.

Praising the regulators' pragmatism at the time, which allowed insurers and the wider financial markets to trade through the aftermath of 9/11, Childs warned that the same attitude may not be applied in future.

"With Solvency II, a new regulator in the PRA (with a different remit from its predecessor), and a prevailing mood of suspicion and scepticism towards the financial services industry, I'm unsure whether this pragmatic approach will exist next time round," he said.

By running some sort of simulation, regulators, ratings agencies and others could be reassured that the insurance market could withstand a shock loss, Childs continued.

Hiscox applied a different reserving methodology for the 9/11 attacks than many other (re)insurers, which allowed the blue-chip carrier to deploy more capital to profitable underwriting in the aftermath of the atrocity.

"The London market needs to act boldly in a major crisis to provide clients with risk capital when they need it most if it is to fulfil its role as the world's specialty insurance centre," he concluded.

Childs' comments follow the PRA's invitation to UK insurers to create and stress test two new disaster scenarios as part of an assessment into how well capitalised they are.

The carriers were also asked to stress test nine specific catastrophe scenarios, including European windstorm and flood, cyber and economic shocks.

In addition, the insurers were required to estimate the size of the loss per event and in the aggregate, using their catastrophe models, and to provide details of the expected reinsurance recoveries split by reinsurers, as well as their view on the likelihood of such an event.

Companies that are participating in the PRA's stress tests are required to respond by 1 October.

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