The Bank of England’s latest stress test results, part of its Systemic Wide Exercise Scenario (SWES), have ascertained that insurers in the United Kingdom have significantly enhanced their ability to withstand financial shocks. The findings highlight key improvements in risk management and liquidity practices across the sector.
The report emphasised a series of measures taken by insurers to mitigate vulnerabilities. These include reducing reliance on derivatives, broadening collateral options, and renegotiating committed funding agreements with banks. Enhanced liquidity management and improved reporting practices also feature prominently as areas where progress has been made.
“The SWES results indicate that insurers have further strengthened their resilience to potential future shocks, allowing some firms to act countercyclically,” the Bank of England noted in its report.
“The Bank of England highlights that insurers have reduced their derivatives exposures, widened the range of assets that can be posted as collateral, and renegotiated committed funding lines with banks. This has been alongside improved liquidity management and reporting, an area of ongoing focus from the PRA.”
Countercyclical actions—where firms expand or invest during economic downturns—can support the broader financial system during periods of instability. Insurers’ ability to operate this way highlights the sector’s growing capacity to absorb shocks without amplifying systemic risks.
The Prudential Regulation Authority (PRA), a division of the Bank of England overseeing financial stability, emphasised that liquidity management remains a critical focus. Improvements in this area are crucial as insurers continue to adapt to dynamic market conditions.
The SWES also underscores the interconnected nature of financial services, calling for a broader understanding of how risks propagate through the system. The report indicated that insurers, banks, and other financial institutions are linked through complex financial instruments and obligations.
“The broader SWES results shine a light on the need to consider the interconnected nature of financial services as part of firms’ robust risk management,” the bank noted.
The report comes amid ongoing macroeconomic challenges, including high inflation, volatile energy prices, and tightening monetary policies. These factors present increased risks to financial institutions globally.
The bank collaborated with the PRA, FCA, and TPR to select approximately 50 firms for the exercise. Firms were chosen based on their activities, business models, and investment strategies. The sample covers key markets, including over 60% of 2023 gilt market turnover, 74% of banks’ gilt repo activity, and more than 90% of the leveraged LDI market, with even higher representation in pooled LDI funds.
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