LIST2025 PRA Life Insurer Stress Test: results so far
We are currently partway through the PRAs release schedule for the results of its first systemic stress test exercise for UK life insurers since 2022, the first since UK Solvency II reforms implemented and the first focussed on Matching Adjustment portfolios since the MA came into being in 2016. The aggregate results are out (here), with individual firm results for the 11 in-scope annuity insurers due to follow early next week, before the UK Budget.
The core stress scenario in this exercise is primarily a credit + real estate stress, applied over three stages. Overall, the simple-mean-across-firms SCR ratio falls from 185% at YE24 to 180% after Stage 1, and 154% after each of stages 2 and 3. The PRA disclose that “All participating firms continue to meet their regulatory capital requirements at each stage of the financial market stress”. We examine the stage-by-stage impacts on a simple-mean aggregate MA across the insurers that took part in the exercise in the bullets and PRA chart below.
- In the first stage, equities fall, interest rates fall and credit spreads widen. In aggregate across the 11 firms MA approximately doubles while FS is almost unchanged. This is substantial regulatory capital relief, which illustrates the importance that BoE places on MA portfolios importance as patient investors in the UK financial system.
- In the second stage credit downgrades and defaults occur alongside falls in valuations of residential and commercial real estate. Aggregate FS increases by around 1/3, but compared to before stages 1 or 2, c90% of the increase in market spreads has flowed through to MA.
- In the third stage market condition begin to stabilise and firms are allowed to restructure their structured equity-release-backed notes and to trade externally in liquid assets. Aggregate FS is broadly unchanged, MA falls, but the pass-thru rate from total spread to MA (versus YE24) remains around c80%.
The PRA report flags that in aggregate, in this (fictional) scenario, firms suffer downgrades from Investment Grade into sub-IG of £12.9bn. How starkly different would the impact of this scenario and resulting messaging have been without the removal of the BBB-cliff in MA reform? If firms are taking prospective expected risk in their MA portfolio after Stage 3 that is c30% higher than at YE24, as measured by FS, then is a (100+X)% SCR ratio based on the 1yr SCR time horizon after the scenario worth as much as the same (100+X)% SCR ratio beforehand?
LIST2025 included an exploratory overlay to the core scenario with amplified credit downgrade rates for each firms most significant specialist asset class exposure. This shows an aggregate SCR ratio impact of only 1%, from 154% to 153%, or an average of £30-40m per firm. Is this the dog that didn’t bark? For example, if an insurer has lent directly to medium or large commercial counterparties at scale, then it could lose this much from less than a handful of loans hitting difficulties.
LIST2025 also included an exploratory overlay to the core scenario in which each firm’s most significant external-to-group funded reinsurance transaction had to be recaptured, This led to aggregate SCR ratios falling from 154% to 144%. PRA indicate that in-scope insurers had c£24-25bn of outward funded-re exposure at YE24 of which around half was (fictionally) recaptured in this scenario. The PRA has indicated that it “will follow up with individual firms where improvements in the methodology are needed” re modelling of, and operational capability to manage, funded re recapture. PRA continues active interaction with industry around potential reform to the regulatory capital treatment of funded re within Solvency UK, eg via the FundedRe roundtables (here and here).
Alan Reed
April 2025
