PRA publishes results of Insurance Stress Test 2022

The PRA has published its Insurance Stress Test 2022 (IST 2022) feedback (23 January 2023).
The letter sets out the results of the IST 2022 which was launched in May 2022, findings on sector resilience, and provides thematic observations that support improvements in risk management.

The PRA’s summary findings indicate the UK insurance sector is resilient to the PRA-specified scenarios, subject to a number of mitigating measures. The results also call attention to the importance of ongoing focus in priority areas; particularly around financial resilience, risk management, and reinsurance risk.

In aggregate for IST 2022 participants:

Life insurance
– Life insurance sector’s solvency capital requirements (SCR) coverage falls from 162% to 123%.
The decline in solvency coverage was largely driven by the impacts of credit downgrades, property shocks, and longevity improvement in the stress scenario. Existing reinsurance assets and assumed management actions further lessen the effect of the scenario.
Two components of the Solvency II regime were also highlighted:
1. Matching Adjustment (MA), which revealed that firms’ risk management needs to be able to respond to distressed asset vulnerabilities in their MA portfolios; and
2. Transitional measure on technical provisions (TMTP), which showed the importance of firms reviewing their phasing-in plans to cover the SCR with eligible own funds when TMTP expires on 1 January 2032.

General insurance
– General insurance sector’s SCR coverage remains above 120% in all scenarios.
Reinsurance from both third-party and related party reinsurers is the main mitigant for losses for general insurers.

The IST 2022 also revealed some common gaps in data and modelling, and identifies some examples of better practice in risk management.

The PRA intends to engage with life insurance firms during Q2 2023 regarding the timing of the next exercise and developments in structural design and disclosure requirements. It will subsequently engage with general insurers in Q3 2023 on the timing and design of the next iteration of the exercise, after taking into consideration the implications of any changes to the life insurance stress test.

FIN. Team