mfsa

The Malta Financial Services Authority’s first stress test on the domestic insurance sector has found that a long period of extremely low interest rates could lead to a drop of seven percentage points in insurance companies’ assets-over-liabilities ratio.

The Domestic Insurance Stress Test Framework is the first comprehensive exercise of its kind to assess the resilience of the domestic insurance sector should there be an adverse scenario.

It confirms that apart from a surge in liabilities, the positive impact arising on bond prices does not completely offset the decline experienced by the other asset classes, such as equities and Collective Investment Undertakings.

The post-stress ratio of 108% is derived from a -1.7% drop in assets and a 4.9% increase in liabilities.

The scenario chosen for this stress test – a protracted period of extremely low interest rates – could lead to a deterioration in corporate bond yields and equity prices, affecting the insurance companies’ investments – and ultimately balance sheets.

The framework was developed by the Financial Stability function at the MFSA and is one of several risk assessment techniques that take a macroprudential view.

Stress tests are widely recognised as being an effective way to measure the resilience to severe but plausible events. Within the financial sector, this technique has gained prominence as a risk management tool.

As a financial sector supervisory tool, it is considered useful to identify pockets of vulnerabilities and is increasingly being used in addition to the more conventional risk analysis techniques.

Stress test results should not be strictly interpreted in terms of institutions passing or failing, but rather to highlight possible sectoral vulnerabilities that could emerge, should such adverse movements on the financial market materialise in the future.

The test covered a mix of life, non-life and composite insurance undertakings that operate predominantly in the domestic insurance market and information was sourced from data available at the MFSA.

The exercise assumes that no immediate adjustments were made through management interventions, and the institutions are assessed on a stand-alone basis, that is, without allowing for any support within a group structure, including a parent company.

Looking forward, the methodology could serve as a guide to the industry to understand better the way the Authority is analysing sectoral risks from a financial stability perspective.

Possible enhancements include further development of the methodology, primarily to enhance the process used in generating the stressed scenarios, and secondly to capture changes arising in the solvency capital requirements.

Related

Malta ‘more attractive to property investors than to people looking to build a career’ – Marisa Xuereb

April 13, 2024
by Robert Fenech

Wages remain low in part because major policy change that made real estate the primary focus of investment, she said

WasteServ issues tender to turn shut Marsaskala waste treatment plant into park

April 12, 2024
by Fabrizio Tabone

WasteServ describes the park, which features an artificial lake, as a ‘green sanctuary’

Islands of fun! Entertainment contributes more to Maltese economy than to any other in Europe

April 12, 2024
by Robert Fenech

The sector also generates much higher value added than it does for any other EU country