The finances of the UK’s largest insurers should remain resilient in the event of severe market shocks, according to the Bank of England’s latest stress test.
This life insurance stress test (LIST 2025) test looked at how the eleven companies active in the bulk annuity market would fare in a global recession. This tested the impact investment portfolios of these insurers would be impacted by a decline in interest rates, falls in equity and property prices, along with the widening spreads and subsequent defaults and downgrades these market conditions might cause.
This is the third time the Prudential Regulator Authority has asked UK life insurers to participate in these tests, but it will be the first time it will publish results detailing how individual firms fared. These will be available next week.
These eleven insurers account for more than 90 per cent of annuity liabilities, and as a result play a key role in the long-term financial security of both savers and the wider economy.
The PRA said that like previous insurance stress test exercises this is not a pass/ fail exercise and will not be used to inform the setting of capital requirements or buffers.
Its results showed that in the core financial market scenario, designed to be ‘severe’ but plausible, firms experienced an aggregate £8.6bn reduction in capital surplus above regulatory requirements, with £12.9bn of assets downgraded to below sub-investment grade.
However the exercise showed that despite this deterioration, participating firms maintained sufficient capital resources, with the aggregate solvency capital requirement (SCR) coverage ratio falling from a strong starting point of 185 per cent to 154 per cent post-stress.
It said all firms would continue to meet their regulatory capital requirements, in this scenario, underscoring the sector’s robust starting position and ability to absorb significant financial shocks
The industry welcomed these findings. Sam Matto-Willey, head of insurer due diligence in the Aon Risk Settlement Group says: “The results released by the PRA today are a valuable step forward for transparency in the UK bulk annuity market.
“LIST 2025 provides greater insight into insurers’ key risk management areas of focus, and on how the UK insurance regime is designed to support effective risk management.
“We note that the PRA has concluded that the life insurance sector is ‘resilient to the type of scenario tested’, but that risks associated with funded reinsurance remain a key focus, with the PRA considering whether further action is needed.”
Matto-Willey adds: “The firm-level results due to be released next week will be another key part of the toolkit to support insurer selection decisions and enhance financial strength due diligence ahead of an annuity purchase.
“Today’s LIST results – which necessarily involve simplifications and limitations at a single point in time – do not provide a ‘one stop shop’ for financial strength information. Considered, holistic analysis of insurers, across financial strength, member experience, ESG and cyber risk management, remains vital for ensuring appropriate decision-making and monitoring.
“We expect that these stress test results will be of most interest to schemes considering insurance – but for schemes that aren’t, they provide some insight into the level of resilience needed to offer benefit security comparable to that achieved by insurance.”
WTW head of pensions transaction Ian Aley says: “The aggregate results published today indicate at a sector level that BPA insurer capital positions are robust and are expected to withstand a severe economic shock.
“This is not surprising given that insurers currently hold significant additional capital over and above that required to withstand a 1:200 shock event but, nonetheless, should be reassuring to anyone considering a bulk annuity.”
He adds: “Whilst today’s results are helpful, what we consider will be more revealing is the publication of the individual insurer results next week which will provide further insights to schemes with an interest in this market.
“We anticipate that pension schemes will seek further diligence in this area such as asking for, and considering, alternative sensitivities. Financial strength is one of many factors considered by trustees and sponsors when selecting an insurer. Others, in particular the impact of insurance on the member experience, will also inform this decision.”
