UK life insurers demonstrate resilience in market stress test, PRA says

Written by Adam Cadle

17/11/2025

The life insurance sector is resilient to a severe financial market stress scenario that impacts insurers’ investment portfolios through a decline in risk-free interest rates, falls in equity and property prices, along with widening spreads and subsequent defaults and downgrades, the PRA has revealed.

The regulator’s 2025 life insurance stress test (LIST 2025) covers eleven of the largest UK life insurers active in the bulk purchase annuity (BPA) market. The 2025 exercise focuses on the solvency positions of individual UK life insurance legal entities as at 31 December 2024.

In the PRA’s core financial market stress scenario – designed to be severe but plausible – firms experience an aggregate £8.6bn reduction in capital surplus above regulatory requirements, with £12.9bn of assets downgraded to below sub-investment grade. Despite this deterioration, participating firms maintain sufficient capital resources, with the aggregate solvency capital requirement (SCR) coverage ratio falling from a strong starting point of 185% to 154% post-stress. All firms continue to meet their regulatory capital requirements, underscoring the sector’s robust starting position and ability to absorb significant shocks of the kind tested in the exercise.

The impact of credit rating downgrades and defaults, as well as the fall in interest rates, are among key drivers of the decline in SCR coverage in the core scenario. UK life insurers are also materially exposed to residential property value falls, as significant providers of funding for equity release mortgages (ERMs, also known as lifetime mortgages).

In addition to the core scenario, LIST 2025 also includes two exploratory scenarios to capture evolving risks in the BPA market. These scenarios are designed to support the development of industry modelling capabilities in two areas: (a) asset concentrations, as firms continue to optimise the risk/reward profile of their investments; and (b) funded reinsurance (Funded Re), given its growing use in the BPA market. The results confirm the industry’s ability to model these scenarios effectively. The PRA will consider how to build on these exploratory scenarios in future exercises.

The aggregate results of the exploratory asset concentration scenario show that the sector remains resilient to the additional stress specified in the exercise. While this partly reflects the way in which firms’ investment portfolios are currently diversified across asset classes, there were also some limitations to this scenario which the PRA will consider in future exercises.

The findings on Funded Re highlight that recapturing reinsured liabilities under stress can significantly affect life insurers’ solvency, albeit that firms could absorb these impacts as at 31 December 2024. Consideration of this risk is especially important given Funded Re’s relatively early stage of adoption – meaning further growth could amplify its impact. The results are consistent with the PRA’s previous statements on how the risks within Funded Re could build up over time, particularly if exposures continue to increase, structures become more complex, and collateral becomes less liquid and harder to value. The PRA is considering whether further action is needed to ensure the regulatory capital treatment of Funded Re transactions is appropriate.

The PRA stated: “While the results of LIST 2025 show the life insurance sector is resilient to the type of scenario tested in this exercise, regulatory exercises such as LIST 2025 are designed to supplement and not replace firms’ own solvency and risk management assessments. Firms’ boards and senior management remain responsible for identifying and managing the risks they face, and for ensuring these assessments remain forward-looking to reflect any changes in the external environment or to firms’ business profiles. The PRA continues to expect all firms to maintain robust risk management capabilities, including use of their own stress and scenario testing, to test their resilience to a range of downside scenarios and to inform their capital planning.”

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