Lessons from the 2022 Insurance Stress Test

The PRA published its Insurance Stress Test 2022 feedback on 23 January.  This covered 54 UK insurers, covering life and general insurers and Lloyd’s syndicates, and tested the sector’s resilience to adverse scenarios specified by the PRA.

The results showed significant falls in solvency for some of the scenarios but average coverage remained above 120% for all scenarios, although this would mean some breaching their internal risk appetites.  Three life insurers’ coverage of SCR fell below 100%, but none breached their MCR.  However, solvency coverage relied on mitigating measures, including management actions and reinsurance.  In aggregate, general insurers ceded more risk in the stressed scenarios than they retained.

For life insurers, the key drivers of the falls in solvency were credit downgrades, property shocks and improvements in longevity.  Management actions assumed by life insurers included sales of assets.  It is important for firms to consider whether, in adverse economic conditions that affected the whole industry, this would be feasible, as the liquidity of assets would be affected by other insurers also trying to sell assets.  This highlights the importance of ensuring that management actions are appropriate. Similarly, and particularly for general insurers, consideration should be given to the likely availability of suitable reinsurance and to ensuring any reinsurance programme is well diversified.

For some general insurers, improvements are needed in quantification of NatCat and cyber losses and second-order balance sheet items such as risk margin, discounting, tax and unexpired risk.  However the PRA noted that in general firms’ modelling capabilities had improved since the first stress test in 2015.

The PRA noted that, particularly for life insurers, the level of governance of the stress testing submitted for this exercise was not sufficiently mature.  In particular, it is important that boards are involved in consideration of any stress tests, whether that it the PRA’s tests, ORSA scenarios or other work.  It is important that boards agree the choice of scenarios and considers the results, including ensuring there is sufficient quality assurance of the work.

The PRA encourages boards to consider its findings and assess whether any action is needed.  Although many insurers did not take part in the exercise, the findings may well be relevant and we therefore encourage all boards to read the letter and consider the risk management actions that could be taken.