2025 Life Insurance Stress Test Shows Strong Solvency Amid Market Shocks
The 2025 Life Insurance Stress Test (LIST) results demonstrate that UK life insurers remain well capitalised and resilient under severe but plausible stress scenarios.
Starting from a strong solvency coverage ratio of 185%, the aggregate coverage after the core stress scenario was 154%, indicating substantial financial strength to absorb significant market shocks. The core scenario included market shocks such as falling interest rates, widening credit spreads, and declines in equity and property values, resulting in an £8.6bn decrease in aggregate capital surplus but maintaining robust capital adequacy across the sector.
The LIST stressed insurers on key potential vulnerabilities, including asset concentration and FundedRe recapture risk. The asset concentration exploratory stress, involving a 20% credit rating downgrade across major asset classes excluding corporate and sovereign exposures, reduced solvency slightly from 154% to 153%, showing resilience but with regulatory caution due to lack of correlation assumptions in the test. This points to a need for further examination of private assets’ impact given their growth and regulatory interest globally.
The FundedRe recapture scenario tested the impact of insurers having to recapture £12.3bn in liabilities, about 50% of aggregate FundedRe exposure. This scenario lowered aggregate coverage from 154% to 144%. While insurers absorbed this impact at end-2024, the Prudential Regulatory Authority (PRA) flagged risks may grow if FundedRe exposures expand, become more complex, or collateral becomes less liquid, suggesting possible future regulatory interventions focusing on capital treatment standardisation and risk mitigation.
Matching Adjustment (MA) played a significant role in mitigating short-term volatility, helping insurers avoid forced asset sales during stress. Even though asset value falls and credit downgrades reduced SCR coverage and portfolio quality, MA met its design purpose by stabilising insurer balance sheets amid volatility.
The 2025 LIST covered major UK life insurers, especially those active in the bulk purchase annuity market, representing over 90% of UK annuity liabilities. This reflects the sector’s critical role in policyholder security and broader economic investment.
The PRA applied a standardised set of management actions across firms but excluded parental support or capital injections, unlike in real-world stress events where firms might receive group assistance. This exclusion means actual solvency coverage might be stronger than stress test results suggest. The PRA noted improved board-level engagement during this exercise compared to prior years.
A notable regulatory development is the PRA’s move toward transparency by publishing individual firm results for the first time, departing from previous confidentiality. This shift aims to enhance market discipline and understanding but positions the PRA as an outlier among global insurance regulators.
Looking ahead, the PRA will likely concentrate supervisory efforts on evolving private asset risks, FundedRe capital treatment, collateral risk management, and the ongoing application and calibration of the MA. These topics are expected to influence the design of the next LIST scheduled for 2027. Firms should anticipate intensified regulatory scrutiny in these areas, based on the insights derived from the 2025 results.
Overall, the 2025 LIST underscores the strength and resilience of UK life insurers under severe scenarios while highlighting emerging areas of risk that warrant continued regulatory focus and potential policy adaptations within the Solvency UK framework.