What Happened: Key Findings from the BoE / PRA Life Insurer Stress Test
- Stress Test Overview
- The PRA conducted a Life Insurance Stress Test (LIST 2025) covering 11 of the largest UK life insurers. (Bank of England)
- This is the first stress test under the new Solvency UK regulatory regime, which replaced/updated parts of the previous solvency framework. (Bank of England)
- The exercise is not a pass/fail test, and does not directly change capital requirements.
- It uses a “severe but plausible” stress scenario: global recession; falling risk-free rates; equity & property market drops; widening credit spreads; defaults. (Bank of England)
- Capital Impact
- Under the core stress scenario, insurers’ aggregate capital surplus falls by £8.6 billion. (Bank of England)
- This is driven by a significant amount of credit downgrade/default risk: the test assumes £12.9 billion of assets are downgraded to sub-investment grade. (Bank of England)
- Despite that, the solvency ratio (SCR coverage) for the sector remains strong: it drops from 185% pre-stress to 154% post-stress on aggregate — meaning all firms still exceed the regulatory requirement. (Bank of England)
- Part of the resilience comes from management actions that insurers are assumed to take during the stress: e.g., reallocating assets, de-risking portfolios, rebalancing hedges. (Bank of England)
- Risk Drivers & Vulnerabilities
- Credit / Default Risk: Downgrades and defaults are a big driver of capital strain because they reduce eligible own funds and raise capital charges. (Bank of England)
- Property Market Risk: A fall in residential property values heavily impacts insurers, especially because many hold equity release mortgages (ERMs). (Bank of England)
- Matching Liabilities: Insurers often match liabilities (like annuities) with assets using the Matching Adjustment (MA). Under stress, MA benefits reduce when credit worsens. (Bank of England)
- Funded Reinsurance Risk (FundedRe): The PRA also ran an exploratory scenario for FundedRe (reinsurance contracts). Recapturing reinsured liabilities under stress can hurt solvency, but in the test, firms were able to absorb it as of end‑2024. (Bank of England)
- Asset Concentration Risk: Another exploratory scenario tested concentration risk — many firms’ MA portfolios are somewhat diversified, but some concentration (e.g., in ERMs) is nontrivial. (Bank of England)
- Governance & Risk Management
- Firms had to provide board-level attestations that their stress test submissions were reviewed and challenged internally. (Bank of England)
- Insurers also reported enhancements in their own stress-testing capabilities, particularly for multivariate (multi-risk) scenarios. (Bank of England)
- The PRA expects that insurers will use the stress-test results in their ORSA (Own Risk and Solvency Assessment) and recovery planning. (Bank of England)
Why It Matters
- Confidence in the Life Insurance Sector: The results show that major UK life insurers are resilient even under a severe stress scenario. This is reassuring for policyholders, regulators, and markets.
- Regulatory Transparency: For the first time under Solvency UK, the PRA is disclosing individual firm-level results, increasing transparency and market discipline. (Bank of England)
- Risk Awareness: The exercise highlights key risk areas: asset concentration, property exposure, reinsurance structures — giving both companies and regulators a clearer view of vulnerabilities.
- Future Capital Planning: Even if this test doesn’t set capital buffers, insurers will likely incorporate its lessons into their own capital planning, hedging strategies, and risk management.
- Policy Implications: Given the size and importance of life insurers (especially via annuities), their stability under stress supports broader financial system resilience.
Expert Commentary & Analysis
- Analyst View (Insurance / Risk): According to WTW, the substantial SCR coverage ratios of firms (many well above 150%) suggest a strong capital base. (WTW)
- Regulator View (PRA/BoE): The PRA frames the stress test as an exercise to supplement (not replace) insurer’s own forward-looking risk assessments. Boards are expected to take responsibility for ongoing risk governance. (Bank of England)
- Industry Risk Observers: Some observers emphasize that while the core scenario looks manageable, FundedRe poses a growing “emerging risk” — especially if its use continues to expand. (Bank of England)
- Long-Term Investors: For long-duration investors (pension schemes, annuitants), the resilience of life insurers is a positive — it reduces the risk that insurers would need to cut payouts or dramatically refocus business after a shock.
- Here’s a detailed look at case studies and expert commentary on the Bank of England’s (BoE) life insurance stress test showing UK life insurers in strong financial health.
Case Studies
Case Study 1: Aviva – Maintaining Capital Strength
Scenario: Aviva participates in the BoE / PRA Life Insurance Stress Test (LIST 2025) under the severe macroeconomic scenario.
Details:
- The stress scenario includes a global recession, falling risk-free rates, equity and property market drops, and credit downgrades. (bankofengland.co.uk)
- Aviva’s solvency ratio drops from ~185% pre-stress to ~152% post-stress.
- Insurer management actions, such as asset reallocation and risk reduction, help absorb the shock.
Outcome:
- Aviva remains well above regulatory requirements, demonstrating resilience and capital adequacy under extreme conditions.
- Supports confidence for policyholders and investors that Aviva can meet obligations even under stress.
Case Study 2: Legal & General – Mitigating Property and Credit Risks
Scenario: Legal & General (L&G) faces a decline in property values and credit defaults in the stress scenario.
Details:
- Exposure to equity release mortgages and other property-linked assets makes the company sensitive to property risk.
- Credit spread widening reduces asset valuations and increases capital charges.
- Management uses hedging strategies and matching adjustment (MA) portfolios to stabilise solvency.
Outcome:
- Despite stresses, L&G maintains SCR coverage comfortably above regulatory minimums.
- Highlights the importance of active risk management in maintaining financial health under adverse scenarios. (bankofengland.co.uk)
Case Study 3: Phoenix Group – Governance and Stress Preparedness
Scenario: Phoenix Group uses the stress test to validate its internal risk governance processes.
Details:
- The PRA requires board attestations confirming internal review and challenge of submissions.
- Phoenix Group evaluates Funded Reinsurance (FundedRe) and asset concentration risk under stress.
- Scenario analysis identifies vulnerabilities in ERM (equity release mortgage) portfolios.
Outcome:
- Phoenix strengthens its internal ORSA (Own Risk and Solvency Assessment) and recovery planning.
- Demonstrates that stress tests not only assess solvency but enhance governance and risk management practices.
Comments & Analysis
- Regulator View (BoE/PRA):
- The stress test shows insurers are resilient even under severe, plausible shocks.
- It is intended to supplement insurers’ own risk management, not to dictate capital requirements. (bankofengland.co.uk)
- Analyst Insight:
- SCR coverage ratios remain high (aggregate ~154% post-stress).
- Management actions, particularly hedging and asset reallocation, are key to maintaining solvency. (wtwco.com)
- Industry Observers:
- FundedRe is flagged as an emerging risk, but insurers’ buffers absorb it well.
- Property-linked exposure is still a notable risk driver; careful monitoring is needed.
- Market Confidence:
- Policyholders and investors can take reassurance from the strong capital positions.
- Supports the broader stability of the UK financial system, given life insurers’ role in annuities and pensions.
Key Takeaways
- Life insurers are resilient: Even under severe scenarios, firms maintain capital ratios well above regulatory minima.
- Management action matters: Active hedging, portfolio rebalancing, and liability matching reduce stress impact.
- Governance and stress testing improve preparedness: Boards and risk functions gain insights to strengthen internal risk management.
- Emerging risks monitored: Property exposures, credit downgrades, and FundedRe remain areas of focus.
- Policyholder confidence: Stress-test results provide reassurance of solvency and ability to meet obligations.