​Danish FSA develops national stress test for pension firms

The Danish Financial Supervisory Authority (FSA, Finanstilsynet) has developed its own stress test for pension providers, saying it takes certain national conditions into account – unlike the European Supervisory Authority for Insurance and Occupational Pension Schemes (EIOPA) version.

The Copenhagen-based financial watchdog announced yesterday that the new stress tests to assess how insurance and pension companies would fare in a severe economic slump were part of its “strategy 2025” to ensure robustness.

“EIOPA’s stress test ensures a high market coverage on the European market, but a low market coverage on the Danish market,” the FSA said.

In recent years, it said, two Danish life insurance companies had participated in EIOPA’s stress test.

“In addition, EIOPA’s stress test does not take national conditions into account, such as the prevalence of market rate products in the Danish pension market,” the authority said, adding that this was the reason it was now carrying out its own stress test.

The EIOPA stress tests are routinely carried out on the largest European insurance companies every two years.

The new Danish stress test has two tracks – one testing the stress of the companies’ solvency position and the other relating to the stress of customers’ pension deposits and benefits, according to the FSA.

The stress test scenario is a severe economic downturn, where inflation and geopolitical tensions lead to global interest rate increases and price corrections on the financial markets, it said.

The FSA said its new stress test supplemented the existing quarterly sensitivity analyses that Danish insurance and pension companies have to do, rather than replacing them.

While the sensitivity analyses are independent of the current risk picture, the scenario in a stress test can vary from time to time depending on the risk picture, the agency said.

“We will carry out the first version of the stress test over the summer of 2023,” the FSA said, adding that the test would initially be limited to eight selected companies – all of which had already had the test in informal consultation in autumn 2022, it said.

The FSA said it would evaluate the exercise once the first stress test had been completed, and that no decision had yet been made on frequency and format, apart from for this first edition of the stress test.

Read the digital edition of IPE’s latest magazine