The Prudential Regulation Authority (PRA) has outlined its plans for next year’s life insurance stress test (LIST).
In “Approach to LIST 2025”, the regulator stated: “This document sets out what the PRA seeks to achieve through stress testing the UK life insurance industry, and its approach for achieving this. It is aimed at PRA-regulated insurers as well as other stakeholders who have an interest in the UK life insurance industry, including academics, analysts, investors, and pension scheme trustees.
“Stress testing exercises give the PRA valuable insights into the financial resilience of the sector and its firms, beyond those that can be obtained from a firm’s solvency and risk management reports. The exercises can highlight vulnerabilities and risks that might not be easily visible in more stable times.”
According to the PRA, the life insurance stress test will not be used to inform the setting of capital requirements or buffers, unlike the annual cyclical scenario bank stress test. Meanwhile the plan is to run life insurance stress tests every two years.
“The PRA has carried out sector-level life insurance stress tests since 2019 and published an assessment of the sector’s resilience in 2023,” the watchdog noted.
“In 2025, the PRA’s stress testing framework will be enhanced with the publication of individual firm results. This will provide market participants with additional transparent, independent measures of a firm’s resilience and facilitate market education and discipline.”
John Burgum, actuarial director at Broadstone, commented that the stress tests are intended to complement firms’ internal testing and will be the first test run under the new Solvency UK regime.
“The stress test aims to provide insights into the sector’s robustness, inform risk management, and enhance market understanding,” he said.
Meanwhile the PRA has also written to firms, seeking technical input before the stress test.
“Alongside publication of the approach document, we are requesting technical input, providing an opportunity for insurers to provide feedback on our proposed guidelines and specifications ahead of the formal launch of the LIST in January 2025,” it told companies.
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