OSFI.STRESS Flashcards
Define the term stress-testing
risk management technique to evaluate
effects of specified changes corresponding to
exceptional but plausible events,
on insurer financial condition
Purpose of stress-testing (CIA.FCT-1) (4)
Risk identification & control
Complements other risk management tools such as BCAR
Supports capital management
Improves liquidity management
What are the responsibilities of senior management regarding stress-testing (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
4 considerations of stress testing programs
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
3 considerations when selecting methodology and scenarios for stress-testing
- create non-historical scenarios
- scenarios should cover all important business and product lines
- stress-testing should feature a range of severities
Specific areas of focus (3/5)
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
OSFI’s considerations in assessing stress-test program (4)
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
Describe and contrast scenario with sensitivity testing
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