The Prudential Regulation Authority (PRA) has announced that majority of the companies that took part in its general insurance stress test in 2015 have passed the exercise.
In his letter to the CEO of participating firms, PRA general insurance director Chris Moulder said the sample insurers were found resilient against specific market-wide stresses, with only a handful of companies likely to breach the solvency capital requirement.
According to the PRA, 63% of the general insurance market participated in the test. The 26 largest general insurers including Lloyd’s syndicates were asked to run five market-wide stress tests to assess market resilience and reliance on reinsurance.
The stress tests covered European windstorm and floods, US hurricanes, synchronised terrorism events, motor liability stress events and an economic shock.
The test results showed that in general, the largest insurers can withstand market-wide insurance scenarios such as a US hurricane. The PRA said this reflects the companies’ diversification and improvements in managing concentrations.
The tests found that an economic shock causes the largest adverse impact, which arises mainly from a fall in the value of corporate bonds as credit spreads are assumed to widen.
The test results also highlighted significant reliance on reinsurance and that these counterparties are well-diversified at an industry level.
Commenting on the results, the Association of British Insurers (ABI) said the PRA’s positive feedback on the 2015 general insurance stress tests demonstrates the strength of the UK industry.
“Firms are well-positioned to withstand extreme scenarios due to their diverse range of portfolios and risks,” said Steven Findlay, ABI assistant director for Prudential Regulation.
“The ABI and its members are committed to continue working with the PRA to ensure policyholders are well protected from risks,” he added. “For instance, by working towards a common terminology and framework for the assessment of risk exposure across industry."
