Eiopa’s Bernardino: stress tests are Solvency II trial run

The stress tests planned for European insurance companies later this year are meant as a trial run for new regulatory oversight, not to assess capital levels, according to Gabriel Bernardino, chair of the newly created European Insurance and Occupational Pensions Authority (Eiopa).

Bernardino says the insurance stress tests are fundamentally different to the stress tests carried out by banking regulators in the US and Europe.

"We all know right now that in the banking area the emphasis is to have an element of restoring confidence in the system and looking at the different banks in order to see what levels of capital they need. That's not the case in the insurance sector," he says.

Instead, this year's tests are intended as a test run for a planned programme of regular tests after the Solvency II capital adequacy regulations come into force in 2013.

Bernardino describes them as "a test of the implementation of the tool. Both in the Solvency II directive and in the Eiopa regulations there is the need to perform stress tests as part of the supervisory regime. So what we are doing by stress-testing insurance for the first time is testing how to implement a programme of stress tests on top of the Solvency II framework."

The tests were launched at the start of the month and will run until the end of May, with results due to be published in July. Similar to the banking stress tests, they will involve testing the capital impact of a baseline economic scenario, an adverse scenario and an inflation shock (the banking tests involved baseline and adverse scenarios and a predicted sovereign debt shock).

The European Central Bank (ECB) was involved in drawing up the scenarios and will play a central part in future tests, along with the European Systemic Risk Board (ESRB), Bernardino says. "The stress tests are the responsibility of Eiopa and we will do it in co-ordination with the ESRB and with the ECB. Definitely the macro scenarios need to be compatible - we are all living in the same economic environment so it is important to have compatible scenarios - but the specific scenarios need to be adjusted, because we are talking about different business models, different horizons and so on.

"So that will be a dialogue, but Eiopa will make the final decision on which stresses should be applied."