Life insurance stress test 2025 results

November 2025

The 2025 life insurance stress test (LIST) aggregate results are out: insurers remain well capitalised under the severe but plausible scenarios. Life insurers began from a strong starting point of 185% and after the core scenario had post-stress aggregate solvency coverage of 154%, demonstrating their financial resilience in a severe market shock. Even after the subsequent exploratory exercises, designed to test potentially systemic issues such as asset concentration and FundedRe recapture, insurers demonstrated strong solvency coverage of 153% and 144% respectively, indicating that these risks are not as systemic as the PRA may have initially suspected. Additionally, the LIST highlighted the importance of the Matching Adjustment (MA), which served its purpose to neutralise short-term volatility and allowed insurers to avoid forced sale of assets – arguably a key part of the MA design.

This article highlights key points from the results and what could be next in terms of policy development and future stress testing exercises.

Background

The 2025 LIST included major UK life insurers, particularly those active in the bulk purchase annuity (BPA) market, representing over 90% of annuity liabilities in the UK. These firms play a crucial role in both financial security for policyholders and broader economic investment.

The exercise was intended to test a severe scenario, with the core scenario targeting a 1-in-100 severity. The PRA did not expect all firms to show Solvency Capital Requirement (SCR) coverage of 100% or more following the stresses, and this contrasts with the resilience shown in the results. The stress test applied a standard set of management actions to ensure comparability across firms, but crucially actions such as parental support or capital injections were excluded – unlike in a real stress, where entities would likely seek parental or wider group intervention to bolster their solvency coverage. The exclusion of these actions has been a point of contention for many firms, who argue their solvency coverage could have been even stronger had these actions been available to them. Despite these limitations, the industry can take comfort from the strong aggregate results.

As the first LIST exercise under the new Solvency UK regime, next week the PRA will follow through with its objective to ‘strengthen market understanding and discipline through individual firm publication’. To date, PRA insurance stress tests have remained confidential, but the departure from that approach to now publishing individual firm results is a significant change that makes the PRA an outlier compared with other insurance prudential regulators.

The Life Insurance Stress Test demonstrates that UK life insurers remain well-capitalised even under severe but plausible conditions. It also highlights areas where some business models are more sensitive. This includes exposure to property-related assets and a Funded Reinsurance recapture scenario, where the PRA is likely to pursue a change in policy to the capital treatment of such transactions. Next week’s publication of firm-level results marks a significant shift in the PRA's approach to the stress testing of life insurers, making the UK an outlier internationally. Nevertheless, the overall results underline the resilience of the UK life market.

Huw Evans

Head of Insurance at KPMG UK

The core scenario subjected solo insurers to a severe but plausible financial market shock, including falling interest rates, widening credit spreads, and declines in equity and property values. The aggregate capital surplus above regulatory requirements fell by £8.6bn, from an aggregate surplus of £30.5bn to £21.9bn. The sector’s aggregate solvency ratio fell from 185% to 154%. These results highlight the market’s robust starting position and its ability to absorb significant shocks.

The PRA welcomed greater board visibility and engagement during the LIST, noting an improvement compared with the 2022 LIST.

The core scenario unfolded in three stages:

Stage 1: An immediate market shock with falling risk-free interest rates, widening spreads, and sharp equity declines. Aggregate SCR coverage fell from 185% to 180%.
Stage 2: A wave of credit downgrades, defaults, and falling property values, reflecting prolonged market stress. SCR coverage dropped significantly to 154%.
Stage 3: Market stabilisation, with firms allowed to recognise certain management actions and required to rebalance portfolios. SCR coverage was unchanged at 154%.

Key drivers of the results included:

Downgrades and defaults: credit rating downgrades reduced the MA benefit, lowering own funds. Meanwhile, defaults directly reduced own funds and increased SCR due to higher capital charges.
Property stress: a sharp fall in residential property values, particularly affecting equity release mortgage (ERM) holdings, was a major driver of SCR coverage reduction. Commercial property impacts were less pronounced due to indirect exposures.
Interest rates: falling interest rates increased the present value of annuity liabilities and backing assets, raising capital requirements.
Inflation: the stress test showed a low impact from inflation, confirming effective asset-liability matching by insurers.
Prescribed rebalancing: firms were required to rebalance portfolios towards higher credit quality, incurring costs that reduce own funds by £0.8bn. However, the impact on SCR coverage was modest (i.e. a 1 percentage point drop) due to offsetting lower capital requirements from improved asset quality.
With-profits funds: those firms with ring-fenced with-profits funds have substantial own funds that cannot be used to absorb losses elsewhere in the firm, so the impact of the stress test on those firms, compared to those with no with-profits business, depended on the size and risk profile of the with-profits fund.

In the exploratory asset concentration scenario, the sector demonstrated resilience to additional, more concentrated stresses i.e. a 20% credit rating downgrade to the most material asset classes in firms’ MA portfolios other than corporate and sovereign exposures.

The asset class for individual firms were subject to PRA agreement. The largest asset class concentration was ERMs, accounting for 16% of the MA portfolio asset value. Other asset classes subject to downgrade were social housing, ground rent, financing lease on commercial properties, and other commercial real estate lending.

The additional downgrades (i.e. additional to the core scenario) resulted in aggregate SCR coverage falling by only 1 percentage point from 154% (core scenario result) to 153%. However, the PRA noted caution when interpreting this result, as it did not consider correlation across asset classes or assets’ varying sensitivity to downgrades.

An interesting takeaway is that many of the assets in this exploratory scenario could be deemed ‘private assets’, but the stress test was not designed specifically to be a private assets exercise. The blanket shock of a 20% credit downgrade does not reflect the idiosyncrasies of different private assets or their links with the wider financial system. This may be an area the PRA explores further, given the growth of private assets and their increasing attention from global standard-setters including the IMF, IAIS and BIS. For more on this subject, see KPMG in the UK’s earlier article on private assets in the insurance sector.

The FundedRe scenario explored the impact of recapturing reinsured liabilities under stress.

Collectively, this scenario saw the recapture of £12.3bn of liabilities, representing approximately 50% of aggregate FundedRe exposure as at 31 December 2024. The aggregate SCR coverage for firms after the recapture event fell by 10 percentage points – from 154% (in the core scenario) to 144%.

While firms could absorb these impacts as at 31 December 2024, the PRA highlighted that further growth in FundedRe arrangements could amplify risks, especially if exposures increase, structures become more complex, or collateral becomes less liquid or harder to value. It also reiterated that it is considering whether further regulatory action is needed to ensure appropriate capital treatment for FundedRe transactions.

Additionally, the PRA noted that this LIST exercise provided insights into firms’ approaches to modelling FundedRe recapture under stress, including their ability to apply a look-through approach to stressed collateral and considering the costs and actions required to move recaptured assets into the MA portfolio. It also noted the mitigating effect of MA-eligible assets in collateral pools, highlighting the importance of robust collateral risk management. Where the PRA found gaps in individual firms’ methodologies, it will follow up with those firms separately.

A key takeaway from the FundedRe results is that the risks of recapture may not be as systemic as the PRA had initially suspected. This raises questions around what risks the PRA will try to mitigate in its upcoming FundedRe policy changes. In a speech in September the PRA focused on amending capital treatment to be standardised with other, economically analogous, transfers of risk. However, the concerns the PRA has raised in the LIST results around the build-up of risks over time, particularly if exposures continue to increase, can lead some to infer that it may also try to halt the growth of these transactions – arguably an objective that is not borne out by the LIST results.

The MA is a key feature of the Solvency UK regime, allowing insurers with long-term liabilities to reduce the impact of short-term market volatility on their balance sheets.

The PRA noted that once falls in the MA portfolio asset values were accompanied by defaults and credit downgrades, firms’ SCR coverage ratios reduced and the quality of their MA portfolios were lower than before the stress.

While the PRA chose to focus on this element, it is also important to note that the MA served its purpose by helping to mitigate short-term volatility and allowing insurers to avoid forced sale of assets – a key part of the its design.

What’s next?

Individual firm results for the core scenario will be published on 24 November 2025.

As the LIST is a biennial exercise that alternates with GI stress testing, the next LIST will be scheduled for 2027. Based on the 2025 aggregate results, firms can reasonably expect supervisory attention on the following areas, and possibly even their inclusion in the 2027 LIST:

Asset correlation: the impact of asset correlation and downgrade sensitivities. This was described as a limitation by the PRA and it will address these in the design of the next LIST.
Private assets: given the growing focus on private assets, a future LIST may consider how different classes of private assets behave in stressed scenarios, the different impacts of these stresses on private assets, and their interlinkages with other parts of the financial system. The 2027 LIST may include more granular stresses for non-market valued assets, either as an exploratory scenario or within the core scenario itself.
FundedRe policy approach: the PRA will consider policy change to ensure appropriate capital treatment of transactions, and is already engaging with industry on potential alternative options. A future LIST may take place when there are new capital rules in the base balance sheet that would impact the results. If the PRA increased capital requirements on FundedRe transactions, could this reduce the impact of a recapture scenario? Alternatively, if the volume and scale of FundedRe transactions grows (as the PRA is concerned it will), could this saturation result in the stresses having a higher impact when compared with the 2025 results?
FundedRe modelling and interaction with other stresses: the PRA will follow-up with individual firms where it found that methodology improvements could be made in recapturing assets into the MA portfolio, such as firms’ ability to apply a look-through approach to stressed collateral and how they consider the costs of rebalancing and trading management actions. The 2025 exercise also did not apply any currency stress to recaptured collateral, and the PRA noted that sterling appreciation against other currencies would have increased the impact of the scenario. Firms could therefore see a 2027 LIST that includes currency stresses in its scenarios.
Simplification: the 2025 LIST allowed simplification in some areas, such as notches and FS add-ons. The next LIST exercise may see the removal of these simplifications, to further test insurers’ resilience and response to a market stress.

Actions for insurers

Modelling capabilities: the 2025 LIST tested multi-phase scenarios, which many insurers found challenging. Firms may benefit from standardising their processes so that future multi-phase scenarios can be modelled faster and easier.
Operationalising stress testing capabilities: firms can continue to innovate and adapt their stress testing capabilities by incorporating more granular and agile models, thus enhancing their product-level sensitivity (e.g. ERMs) and stimulating the effects of sudden policy shifts as well as geopolitical uncertainty.
Assets: continue identifying risks affecting assets, especially private assets, including systemic and idiosyncratic risks, concentration, valuation, liquidity etc.
FundedRe: continue improvements in recapture modelling methodologies, and consider the impact of potential changes in capital treatment on the commercial terms and/or feasibility of new transactions.