OSFI.STRESS

Question 1

Define the term stress-testing

Answer 1

risk management technique to evaluate
effects of specified changes corresponding to
exceptional but plausible events,
on insurer financial condition

Question 2

Purpose of stress-testing (CIA.FCT-1) (4)

Answer 2

Risk identification & control
Complements other risk management tools such as BCAR
Supports capital management
Improves liquidity management

Question 3

What are the responsibilities of senior management regarding stress-testing (3)

Answer 3

• responsible for implementation, management and oversight of the program
• identifying and describing the company’s risk appetite
• understanding the impact of stress events on the risk profile of the company

Question 4

4 considerations of stress testing programs

Answer 4

RUDI
RANGE: stress-testing should use a range of perspectives and techniques
UPDATE: stress-testing frameworks should be updated regularly
DOCUMENTATION: proper documentation of methodology should be available
INFRASTRUCTURE: stress-testing infrastructure should be flexible if assumptions or methods change

Question 5

3 considerations when selecting methodology and scenarios for stress-testing

Answer 5

• create non-historical scenarios
• scenarios should cover all important business and product lines
• stress-testing should feature a range of severities

Question 6

Specific areas of focus (3/5)

Answer 6

CRRRS

Risk mitigation - stress-testing should facilitate the development of mitigation or contingency plans

Securitization and Warehousing risks - stress-testing should cover securitized exposures, pipeline and warehousing risks

Risks to reputation - institutions should enhance its stress-testing methodologies to capture the effect of risks of reputation

Counterparty credit risk - an institution may have large gross exposure to leveraged counterparties

Risk concentrations - stress-testing should consider risk concentrations resulting directly from risk taking activities as well as those resulting indirectly from actions to mitigate risks

Question 7

OSFI’s considerations in assessing stress-test program (4)

Answer 7

AFSV

APPROPRIATENESS: are scenarios appropriate for institution’s risk profile
VIABILITY: are there scenarios included that compromise viability
FREQUENCY: is stress-testing frequent enough for timely management action
SEVERE SHOCKS: do scenarios include severe shocks & sustained downturns

Question 8

Describe and contrast scenario with sensitivity testing

Answer 8

Scenario testing:
- significant changes to risk factors
- observe future state including ripple effects & management actions over a longer time horizon
- more complex & comprehensive

Sensitivity testing:
- incremental changes in a risk factor
- shorter time horizon
- requires fewer resources