BoE: Life Insurance Stress Test (LIST) 2025 Published

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Image of Bank of England © Getty
John Burgum, Actuarial Director at Broadstone, discusses the PRA’s Life Insurance Stress Test framework for 2025

The PRA have today published information relating to their next Life Insurance Stress Test which will be conducted in 2025 (LIST 2025).

"This is the latest in a number of sector-level stress tests that have been carried out since 2019. Going forward, the PRA anticipates running life insurance stress tests every two years covering different sectors and risks," says John Burgum, Actuarial Director at Broadstone.

“The stress test aims to provide insights into the sector’s robustness, inform risk management and enhance market understanding," he says.

"The 2025 LIST will apply to UK life insurers active in the bulk purchase annuity (BPA) market with the largest annuity portfolios. The PRA notified those firms that are in scope in January 2024 and includes firms covering at least 90% of the annuity liabilities across the sector."

The PRA aims to launch the exercise in January 2025 and publish results in Q4 2025.

"These stress tests are intended to complement the firms’ internal testing and will be the first test run under the new Solvency UK regime,” concludes Burgum.

Purpose and Objectives of LIST 2025:

The Life Insurance Stress Test (LIST) for 2025, published by the Prudential Regulation Authority (PRA), is designed to assess the resilience of the UK life insurance sector under severe but plausible stress scenarios. This initiative is part of a broader regulatory framework aimed at ensuring the financial stability and robustness of the life insurance industry. The PRA has been conducting sector-level stress tests since 2019, with the upcoming 2025 test focusing on life insurers active in the bulk purchase annuity (BPA) market. This group of insurers is critical due to their significant role in providing long-term retirement income and supporting defined benefit pension schemes.

Publication and Timing:

The documents published today include an approach to the LIST 2025 and a request for technical input from insurers. The PRA aims to enhance transparency and understanding of the sector's financial resilience by publishing individual firm results for the first time. This step is expected to strengthen market discipline and inform stakeholders about the robustness of individual firms. The stress test exercise will be launched in January 2025, with results expected by Q4 2025.

Key Components and Scenarios:

The stress test framework for 2025 includes one core scenario and two exploratory scenarios. The core scenario will focus on financial market stress, similar to the 2022 exercise, and will test the resilience of the sector to severe economic conditions. The exploratory scenarios will address emerging risks such as asset-type concentration and the recapture of FundedRe arrangements under stress. These scenarios are designed to build industry capabilities in modelling complex risks and to provide insights into potential vulnerabilities.

Solvency UK Regime:

The 2025 LIST will be the first conducted under the new Solvency UK regime, which aims to provide more flexibility in investment strategies while maintaining high standards of policyholder protection. The new regime includes reforms to the Matching Adjustment, allowing a broader range of assets to qualify and providing stronger incentives for insurers to invest in long-term, predictable cash-flow assets. These reforms are expected to enhance the competitiveness of the UK insurance sector and support economic growth by promoting long-term investments.

Request for Technical Input:

Alongside the approach document, the PRA has requested technical input from insurers on the proposed guidelines and specifications. This feedback will help refine the scenario assumptions, governance, and quality assurance requirements for the stress test submissions. Insurers are encouraged to provide their comments by September 6, 2024, to ensure that the final framework is robust and comprehensive.

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