Stress testing is an appropriate tool to identify vulnerabilities of the financial system and to assess the potential impact of risks on the stability of the financial system in general and the insurance sector more specifically. Stress testing also helps to identify those undertakings that may pose a risk to the stability of the financial system or the insurance sector. The National Bank of Belgium (NBB) can, after the analysis of the stress test results, issue recommendations to be implemented by the insurance undertakings in order to contribute to the stability of the financial system.

In 2018, the Belgian insurance sector is subject to a stress test consisting of two scenarios and a questionnaire on cyber risk. The scenarios and the questionnaire have been developed by EIOPA for their 2018 European insurance stress test and are adopted by the NBB and applied to a significant part of the Belgian insurance sector.

The first scenario (Yield Curve Down) assumes a persistent low yield environment and a significant increase in the average life expectancy across the entire population. The second scenario (Yield Curve Up) assesses the impact of a sudden and sharp increase in yields, an instantaneous increase in lapses and higher than expected claims inflation on the solvency position of an insurer. The stress test is a bottom-up exercise focussed on individual insurers. The published results focus on the Yield Curve Up scenario given that this type of scenario hasn’t yet been discussed in previous stress test exercises.