Stress and scenario testing are important risk assessment tools. They also provide useful ways to prepare in advance for adverse scenarios so that management doesn’t have to create everything from first principles when something similar occurs.
But trying to imagine scenarios, particularly very severe scenarios, isn’t straightforward. We don’t have many examples of very extreme events.
Some insurers will dream up scenarios from scratch. It’s also common to refer to prior events and run the current business through those dark days. The Global Financial Crisis is a favourite – how would our business manage under credit spread spikes, drying up of liquidity, equity fall markets, higher lapses, lower sales, higher retrenchment claims, higher individual and corporate defaults, switches of funds out of equities, early withdrawals and surrenders and increased call centre volumes?
Mortality rates are estimated anywhere between 30% and 100% without treatment. Many estimates are towards the top end of this range, 80% to 95%. Treatments are available (mostly antibiotics) and are generally effective. Mortality rate where adequate treatment is administered within 24 hours can be 11%. (Either “just 11%” or “11%!” depending on whether you’re counting up from 0% or down from 95%.)