Hiscox chairman: PRA stress test ‘does not go far enough’

The PRA’s planned stress test of UK general insurers “does not go far enough”, according to Hiscox chairman Robert Childs.

Earlier this month, the PRA sent a request to the UK’s largest general insurers, asking them to participate in a stress test.

The test is designed to allow the regulator to assess insurers’ resilience and monitor how they are developing their Own Risk and Solvency Assessment – a key component of Solvency II.

In a statement accompanying Hiscox’s first-half results, Childs said: “Although in our industry we regularly model the impact of a wide range of serious catastrophes, we fully support the Prudential Regulation Authority’s (PRA) new stress test to show how insurers would cope in the event of a range of extreme scenarios.

“However, I feel this does not go far enough, and that there needs to be a detailed practical dry run of how a serious catastrophe may play out involving all London market players, including our supervisors at the PRA and Lloyd’s.”

Childs pointed out that after the September 11 2001 terrorist attacks in the US, regulators allowed insurers to continue trading despite the uncertainty at the time. Childs said the regulators’ pragmatism helped “keep the wheels of global business turning”.

But he added: “However, 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.

“Running such a simulation would, in my opinion, help to reassure regulators (and ratings agencies) that our market could withstand a shock loss giving them the confidence to allow us to perform our primary role, which is to deal with the fallout from catastrophes.

“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.”

Companies participating in the PRA stress test are required to respond by 1 October.