Life Insurance Stress Test 2025 and Bulk Purchase Annuity market update

What you need to know

• The PRA has now released the sector and individual results of its life insurance stress test (“LIST”) 2025 which seeks to test whether insurers can withstand a severe yet plausible financial shock; it is not a pass-fail exercise but provides the PRA, trustees and sponsors with information about their resilience.
• Insurers demonstrated resilience to a severe stress (broadly a 1-in-100 year event), given the substantial level of excess capital in the market, with a fall in the aggregate solvency capital requirement (“SCR”) coverage ratio from 185% to 154% under the core scenario.
• Insurers were also resilient to additional shocks with the exploratory scenarios on asset concentration and funded reinsurance (“FundedRe”) resulting in further decreases to the aggregate SCR coverage to 153% and 144% respectively.  
• On an individual basis, all insurers retained headroom above the minimum requirement of 100% with those with higher starting capital ratios maintaining significant headroom.
• Business model and mix had a material impact. Those with large ring-fenced with-profits funds (Aviva, M&G and Standard Life) had lower ratios post-stress, in part due to the impact of the treatment of with-profits on a regulatory basis; these insurers argue that a ‘shareholder’ view that adjusts this better reflects the risks for policyholders.
• The exercise has limitations, including that the core stress is just one possible scenario and that the PRA prescribes a limited list of management actions, for example with insurers that are part of wider groups not able to account for support that may be available and which could make a difference to results.
• Overall, LIST 2025 is reassuring, however, future exercises may allow for better comparison between insurers as the PRA learns from this first round and once capital ratios converge towards normalised levels at the top end of the market.