Insurance industry told to conduct disaster stress testing

Insurance industry told to conduct disaster stress testing

I freely admit to being something of a pessimist when it comes to foreseeing potential disaster scenarios everywhere. That probably comes as part of the job. But at least I am not as pessimistic as the Prudential Regulation Authority, the branch of the Bank of England that is responsible for ensuring the resilience of the financial system in the UK.

The PRA has just asked leading insurance companies to envisage a number of ‘worst case’ scenarios, to see how the insurance industry would cope with a series of disasters. The 11 wide-ranging events include a geomagnetic storm leading to power outages and loss of communication systems, cyber-attacks on large multinational organisations and three hurricanes the size of Hurricane Katrina all occurring in the US during the same year. Another doom-laden scenario given to the insurance companies involves a synchronised terrorist attack in London, New York and an unnamed third city, each city being hit with a 2 tonne lorry bomb.

The disasters are part of a series of stress tests designed to assess the resilience of UK insurers and monitor how insurers are developing their own risk and solvency models. The companies need to identify the claims they would face during the situations and test their solvency. The tests reflect the concerns that regulators have about the changing nature of insurance risks.

This is not an idle exercise, the PRA are deadly serious in their testing regime and if any insurance companies are deemed to be insufficiently resilient to withstand these kinds of shocks then they will be asked to take corrective action. This is a valuable exercise that all businesses should undergo, on an appropriate scale. In addition to helping prepare yourselves for disaster, the planning and testing process is likely to reveal lower level vulnerabilities that can be corrected and train your employees to respond more effectively during an actual business disruption event. In other words, help you to turn yourselves into a resilient organisation.

If you want to know how Crises Control can help you to turn yourselves into a more resilient organisation, including functions for response testing and desktop, or even virtual, exercises, visit our features pages.

Rickie Sehgal