Navigating the 2025 PRA Life Insurance Stress Test: Insights and Strategies

February 2025

Navigating the 2025 PRA Life Insurance Stress Test: Insights and Strategies

Seven key considerations for firms

In January 2025, the PRA unveiled the final calibrations for the Life Insurance Stress Test (LIST), a pivotal exercise designed to evaluate the resilience of the life insurance sector against severe but plausible adverse scenarios. This year's LIST is particularly significant as, for the first time, individual firm results for the core scenario will be disclosed publicly. This additional transparency aims to enhance market understanding of life insurers' resilience and foster greater discipline within firms.

The LIST is a biennial exercise, alternating with the general insurance stress test, and involves 11 legal entity insurance companies. Alongside the final calibrations and a Dear CEO letter, the PRA has previously set out the objectives, scenario specifications and the content required for firms to complete their 'Results and basis for preparation' (RBP). The deadline for submission of results is June 16 2025, with the PRA looking to publish results in Q4.

As firms prepare for the LIST, meticulous planning, disciplined project management and thorough results assurance will be crucial – particularly given the publication of individual results.

Below, KPMG in the UK breaks down the key considerations and scenarios that firms should focus on as they embark on this critical exercise.

Scenarios

The PRA has set out two types of scenarios for the LIST:

A 'core' 1-in-100 financial market stress, composed of three sub-stages. The core scenario simulates a severe global recession with a three-stage evolving financial market stress including drops in interest and inflation rates, equity and property value declines, and credit spread widening.

The results of this scenario will be published at individual firm level. The PRA will provide some market education for potential users of the results, in advance of the Q4 results publication.

Two exploratory scenarios on asset concentration and Funded Re recapture. The asset concentration scenario assesses resilience to an additional stress for the asset type most material to the firm’s matching adjustment. The Funded Re scenario asks insurers to look at the stress of recapturing their most material Funded Re arrangement.

The ‘material’ Funded Re counterparty and asset type has been agreed directly between the PRA and the in-scope firms (but excludes corporate and government bonds).

Each of these stresses is applied after the three stages of the core scenario. Insurers are asked to submit quantitative data on their balance sheets, capital requirements and own funds, along with a qualitative report detailing their management actions and assumptions. The results of the exploratory scenarios will be published at an aggregate level.

Considerations for insurers

Key considerations for in-scope firms include:

Group/external disclosures: firms need to be able to articulate what their individual results mean to their stakeholders. Insurers may want to include additional voluntary disclosures to cover the impact of further management actions or to show stresses at a different level, such as impact on group results (to supplement the legal entity results the PRA will publish).
Ordering of scenario modelling: the scenarios have to be applied in a specific order, with actions to be taken in between the stages. Firms need to consider the detailed modelling and ordering approach of these scenarios.
Funded reinsurance: the specific Funded Re recapture scenario requires look-through to underlying collateral, including how this is stressed in line with the scenarios and firm-specific matching adjustment (MA) eligibility assessments. Firms’ progress in complying with PRA expectations in PS 13/24 on Funded Re will likely impact the extent to which these processes are already set up. Even for well-progressed firms, YE24 may be the first time that full look-through Funded Re SCR calculations have been performed, so extending this to a stress and scenario exercise in early 2025 will be challenging.
Management actions: firms should consider the management actions to be implemented within the LIST, and any further management actions for the exploratory scenarios. There is further complexity as some management actions are implemented between scenario stages - firms may want to find ways to simplify their implementation. If firms have automatic management actions, they should check if PRA requirements mean these actions need to be disabled for this exercise.
Stressing unmodelled calculation: this needs to be assessed for each of scenario and for both base balance sheet and SCR. Careful thought and documentation should be given as some UK Insurers have a large number of unmodelled calculations in the best estimate of liabilities (BEL) and SCR.
Planning and resourcing: firms need to create a detailed plan and confirm they have the resources for the project. A basis of preparation document will likely be required by end of February to meet the June deadline.
Level of review or assurance: Insurers need to determine the right level of internal or external review for the LIST process and results. The PRA expects the LIST results to be “of a standard equivalent to that which is sufficient for external unaudited public disclosure”.

Next steps for the PRA and insights from other stress tests

The primary purpose of the LIST is to examine firm-level resilience to stress events. However, the PRA is likely also to consider whether further supervisory or policy steps are needed based on insights from the LIST – particularly for Funded Re (further information on Funded Re here).

Beyond firm-level resilience, the PRA is interested in the interlinkages between (re)insurers and private credit, an area of focus in the latest Bank of England (BoE) Financial Stability Report. The System-Wide exploratory scenario (SWES) has also highlighted the conflict of interest between PE funds’ investment into (re)insurers, who in turn hold illiquid private assets in corporates within the fund’s portfolio.

Moving forward, KPMG in the UK anticipates that the PRA could make stress tests across different sectors more consistent (e.g., using similar scenarios) and interlinked (e.g., looking at insurers’ coverage in response to flooding to consider implications for banks’ mortgage lending).

How KPMG in the UK can help

KPMG in the UK has a dedicated Actuarial, and Risk and Regulatory Advisory practice with extensive life insurance experience and insights. We can support firms with performing the LIST calculations or in performing a review exercise, including: