The New York State Insurance Department will be calling all insurers in the state to schedule their financial stress tests.
Most of the reviews will be conducted at the insurers’ offices, and department regulators expect most to take a day or two, officials say.
New York regulators have described the stress tests in Circular Letter Number 25 (2008).
Regulators will look at companies’ forecasting models, the scenarios fed through the models, and evidence that companies’ managers used the results of stress testing to run the companies’ operations, officials write in the circular letter.
“The department expects every insurer to have a scenario stress testing process in place as part of prudent management,” officials write. “The department intends to review those processes, including investment functions, to discern how different economic scenarios are analyzed by senior management to determine what actions are warranted. Insurers should systematically review their stress testing and scenario analyses, especially in light of recent market events.”
Scenarios tested could include interest rate shocks, stock market shocks, yield curve shifts, changes in credit quality and liquidity, rating agency downgrades, collateral calls, and large-scale catastrophes, officials write.
In addition to reviewing companies’ models, “the department will evaluate how such models are independently reviewed within the company by risk management professionals, internal auditors, external auditors and/or consulting firms,” officials write.