The Prudential Regulation Authority (PRA) has revealed the results of the insurance stress test (IST) it conducted in 2022 among 54 participating insurers.
Launched last May, the stress test involved 16 life insurers, 17 general insurers, and 21 Lloyd’s syndicates. The general insurers and Lloyd’s syndicates assessed their solvency position against a set of insured natural catastrophe and cyber losses, while the life insurers examined their solvency position following an adverse economic scenario and an increase in longevity.
In the regulator’s letter to the participants, insurance supervision executive director Charlotte Gerken noted: “The results indicate that the UK insurance sector is resilient to the PRA-specified scenarios, subject to a number of mitigating measures, while highlighting and supporting the need for ongoing focus in a number of priority areas.
“These are consistent with those set out in our recent ‘Insurance supervision: 2023 priorities’ letter, in particular, around financial resilience, risk management, and reinsurance risk.
“In aggregate for IST 2022 participants, the life insurance sector’s solvency capital requirement (SCR) coverage falls from 162% to 123% and the general insurance sector’s SCR coverage remains above 120% in all scenarios.”
The PRA found that the impacts of credit downgrades, property shocks, and longevity improvement in the stress scenario were the largest drivers of the decline in solvency coverage for life insurers, while the primary mitigant for losses for general insurers is reinsurance from both third-party and related party reinsurers.
“This exercise has also identified some common gaps in data and modelling, and highlighted examples of better practice in risk management,” added Gerken, whose camp provided a summary of the main points on the subject.
She went on to write: “We encourage boards to assess whether the risk management findings and gaps highlighted… apply to their firm and, if so, to commission an action plan to address them.”
Meanwhile the PRA will be hosting separate industry forums on the stress test for life insurers and for general insurers.
Thanking the participating companies, Gerken said: “In an external environment of high volatility and uncertainty, stress and scenario testing will become an even more important tool for firms to assess their own resilience, and for the PRA in pursuing a forward-looking, proportionate, and judgement-based approach to supervision.”
