OSFI.STRESS Flashcards

1
Q

Define the term stress-testing

A

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

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2
Q

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

A

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

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3
Q

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

A
  • 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
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4
Q

4 considerations of stress testing programs

A

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

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5
Q

3 considerations when selecting methodology and scenarios for stress-testing

A
  • create non-historical scenarios
  • scenarios should cover all important business and product lines
  • stress-testing should feature a range of severities
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6
Q

Specific areas of focus (3/5)

A

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

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7
Q

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

A

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

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8
Q

Describe and contrast scenario with sensitivity testing

A

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

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