The prudential regulator says its stress tests last year of the 21 largest life insurers indicate they are well-positioned to withstand a very severe economic downturn.

Specifically, the results indicate that despite significant losses of capital under a severe economic downturn, the insurers as a whole remained above their minimum capital requirements, while still meeting their commitments to policyholders.

The stress tests comprised of 14 direct life insurers and seven reinsurers, covering 90% of the sector by gross written premium.

In the stress tests, life insurers were put to a scenario where the economy shrank 15%, unemployment rate exceeded 13% and there was significant claims deterioration.

But APRA says some insurers fell below their minimum capital requirements during the stress tests because of large investment losses from exposures to lower-rated investments and significant deteriorations in disability income insurance claims.

“Importantly, however, these results are before any benefits that insurers would derive from management actions to respond to the stress,” APRA said.

“After deploying management actions to mitigate the stress, capital levels return towards pre-stress levels.”

APRA says management actions used in response to the stress tests were crucial for rebuilding insurers’ capital levels, particularly insurers that breached minimum capital requirements under the severe downturn scenarios.

In relation to recovery plans, the regulator says several life insurers need to further improve in this area as what they have at the moment are “not yet mature”.

APRA says they need to “effectively embed [their] recovery plans” into the broader risk management frameworks.

Going forward APRA will continue its program of targeted stress testing activities on regulated institutions, subject to macroeconomic and emerging risks.

“Building on lessons learned from recent industry stress tests, APRA intends to consult in the future on new guidance for entities on stress testing,” the regulator said.

“In doing so, APRA aims to enhance the insurance industry’s stress-testing capabilities, as well as APRA’s own ability to promote the stability of Australia’s financial system.”