General insurers have identified improvements to stress-testing regimes for the next year to 18 months, but boards must set out clear plans to achieve them, the Australian Prudential Regulation Authority (APRA) says.

Having examined insurers’ submitted summary statements, APRA says it expects changes to include sophisticated analysis tailored to risk profiles.

It also wants to see reverse stress-testing and enhanced mechanisms for considering stress-testing in strategic and business planning, risk and capital management.

“Most summary statements have limited – or in some cases no – details on the stress scenarios and methods to be used,” APRA says in a letter to insurers.

“APRA does not expect that the entire methodology for stress-testing is set out in the summary statement. But it is expected to contain an adequate summary of the key elements of the chosen stress-testing approach.”

The regulator says it often finds stress tests to be generic and insufficiently severe. The tests “should include a variety of plausible and severe scenarios tailored to the risk profile. Most statements did not have much description of board engagement in the stress-testing process.”

APRA says appointed actuaries sometimes take the lead in determining changes to stress-testing and ensuring material risks are covered. Only after the actuary reports does the board consider the recommendations.

The regulator expects boards to play a role developing scenarios to be tested and to be informed of the basis for stress test inputs. It wants them involved in reviewing the outcomes of stress-testing and challenging management.