Think tank 2° Investing Initiative (2DII) has created “snap scenarios” for a COVID19 'stress test' – believed to be the first in the world – and will work with the European Insurance and Occupational Pensions Authority (EIOPA) to apply them to the portfolios of large insurers.
Speaking to RI, 2DII Managing Director Jakob Thomä said the scenarios were developed last week, and will be launched in a 30-page discussion paper today. They use indicators identified by the European Systemic Risk Board, which underpin the European Banking Authority’s now-delayed 2020 stress test. Indicators include equity prices, corporate default, unemployment levels, houses prices and GDP.
“We used most of the indicators and looked at what could happen to them over the next 36 months in six COVID19 scenarios,” he said. As part of its existing partnership with EIOPA, 2DII will now feed those scenarios into financial analysis of the investment portfolios of major insurers.
“Obviously, there is a lot of nuance and bottom-up work that needs to be done to identify risks in this situation, but what we’ve created is an initial a ’hot spot’ analysis, rather than a fully-fledged stress test.”
The scenario models will be made public via a discussion paper, and may also be useful for banks, said Thomä.
The scenarios will be strengthened “on an ongoing basis in the next few months, integrating all the available inputs from other supervisors, financial institutions, credit rating agencies, and the broader research community, as the situation evolves,” the think tank said in a statement.
It added: “To support this response, 2DII will temporarily re-allocate some of its resources dedicated to climate stress-testing. We welcome every technical input and expression of interest to join forces on this effort.”
“We don’t have pandemic expertise,” Thomä concedes. “But we have a lot of experience in scenario modelling and translating non-financial risks into stress tests that can be used by the financial sector. And our mission statement as an organisation is to look at long-term risks in portfolios, so at times like this we need to take that mission beyond climate. It’s all hands on deck.”
Note: This article was amended to clarify that EIOPA is conducting the financial analysis, not 2DII.