The Prudential Regulation Authority (PRA) has set its 2025 priorities for the UK insurance industry in 2025, emphasising financial security for policyholders, safe operations, and adaptation to reforms and emerging risks.
One major change is the introduction of Solvency UK, a simplified framework designed to reduce red tape and encourage new insurers to enter the market. The PRA believes these changes will make the industry more competitive while keeping firms financially secure. New rules are also being introduced to help insurers manage risks tied to long-term investments.
Another area being examined is the bulk purchase annuity (BPA) market. The PRA wants to make sure insurers are appropriately managing their risks and budgets as this sector expands.
The PRA is also advising general insurers to maintain underwriting discipline and make sure they have enough funds put aside to pay claims. Although inflation has decreased, uncertainty still exists, and the regulator is working to maintain the industry’s resilience.
Additionally, in 2025, life insurers will be put through a stress test to see how well they handle significant economic downturns. New rules requiring insurers to strengthen their approaches to managing liquidity and financial challenges will take effect at the same time.
The PRA also strongly prioritises operational risks such as system outages and cyberattacks. Insurers will need to adhere to more stringent guidelines for handling disruptions by March 2025 in order to ensure that they can quickly recover from issues that may affect their customers.
Furthermore, the PRA has raised concerns about slow progress on climate risk. It plans to issue more guidance to help insurers properly account for environmental risks in their strategies.
These steps reflect the PRA’s determination to keep the UK insurance market competitive and secure, ensuring consumers are protected and the industry can thrive in an uncertain future.
LCP partner and co-lead of the insurer financial risk team James Silber says: “We welcome the PRA’s 2025 insurance supervision priorities, much of which focuses on the UK BPA insurers given the rapid growth in buy-in volumes. The PRA seeks to strike a balance between the need for increased capacity to meet high demand without compromising risk management in a way that weakens the protection for current and future policyholders.
“In particular, the PRA notes its continued focus on BPA insurers’ use of funded reinsurance (“FundedRe”), where it believes the current growth has the potential to lead to systemic risks if not properly controlled. The PRA set out its expectations for the use of FundedRe in July 2024 and now notes that the BPA insurers are not yet fully meeting these expectations. Some firms have individual counterparty FundedRe exposures that could see them falling below their solvency risk appetite in the event of a reinsurer default – although they would still meet their regulatory Solvency Capital Requirement.
“It is perhaps to be expected that it will take time for the BPA insurers to meet PRA expectations in full, and we are reassured that the PRA anticipates rapid progress will be made this year to address remaining gaps. A FundedRe stress is included in the 2025 Life Insurance Stress Test (“LIST 2025”) exercise that is due to be published at the end of the year. This will help the PRA to assess and compare exposures across the market.
“However, the FundedRe aspects will not be disclosed publicly at a firm level, meaning it won’t provide visibility of FundedRe exposures and sensitivities for individual BPA insurers. We have been calling for greater disclosure of FundedRe exposures for some time and are hopeful that the insurers will voluntarily disclose greater detail in their year-end results that will be published in March.”
