The UK bulk purchase annuity (BPA) market remains robust even under severe financial market stress, according to the Prudential Regulation Authority’s (PRA) latest life insurance stress test.
LIST 2025 examined 11 of the largest UK life insurers active in the BPA market, covering more than 90% of annuity liabilities. Under the PRA’s core stress scenario – ‘severe but plausible’ – the insurers saw a combined £8.6bn (€9.8bn) hit to capital surplus and £12.9bn in bond downgrades.
Despite this deterioration, PRA said that 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.
This means that 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 PRA also tested the industry’s ability to assess and monitor the impact of recapturing the transferred risks under stress conditions. In this scenario, firms’ results indicated the recapture of £12.3bn of liabilities, representing approximately 50% of their aggregate FundedRe exposure as at 31 December 2024.
The aggregate SCR coverage for the firms recapturing FundedRe falls by 10 percentage points – from 154% (in the core scenario) to 144%.
The findings on FundedRe 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 FundedRe’s relatively early stage of adoption, which means further growth could amplify its impact.
The findings are consistent with PRA’s previous statements on how the risks within FundedRe 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 FundedRe transactions is appropriate.
James Silber, partner at LCP, said: “The initial aggregate results of LIST 2025 show a reassuring picture of resilience across the bulk annuity insurers, even under severe financial stress. That should give trustees and sponsors confidence in the sector’s overall financial strength and additional comfort over the security of insured member benefits.”
He added: “Today’s results indicate all firms remained solvent throughout the core scenario with significant but manageable impacts at the aggregate level. Additional testing on Funded Reinsurance shows limited aggregate exposure in the event of a reinsurance failure. This is reassuring as it adds colour to the industry’s exposure to Funded Reinsurance – an aspect that has typically been difficult to properly assess from existing public disclosures.”
Matthew de Ferrars, partner at Pinsent Masons, noted that when selecting a bulk annuity insurer to partner with a pension scheme, trustees will make an assessment of insurers’ financial strength and resilience.
“The main focus of this has often been on the overall strength of the UK insurer capital and solvency regime,” he said, adding: “Now that we are shortly going to get insurer-level results from the PRA’s LIST 2025, the question is whether that focus will change to making a more in-depth comparison between insurers.”
Simplistic comparisons
However, given that the scenario used for the LIST 2025 was only a single scenario and very sensitive to the variety of ways different insurers invest, de Ferrars warned that there is a danger of overly simplistic comparisons between insurers being drawn.
He said: “Trustees should continue to focus on the strength of the regime as a whole and the industry-wide level results of the LIST 2025, which have shown that the sector as a whole is resilient to the severe financial market stress scenario it has been tested against.”
Sam Matto-Willey, head of insurer due diligence at Aon Risk Settlement Group, agreed that the results are simplistic and limited and do not provide a ‘one-stop shop’ for financial strength information.
“Considered, holistic analysis of insurers, across financial strength, member experience, ESG and cyber risk management, remains vital for ensuring appropriate decision-making and monitoring,” he said.
“We expect that these stress test results will be of most interest to schemes considering insurance – but for schemes that aren’t, they provide some insight into the level of resilience needed to offer benefit security comparable to that achieved by insurance,” Matto-Willey noted.
Ian Aley, head of pensions transactions at WTW, added that while today’s results are helpful, he expects the publication of individual insurer results next week to be more revealing.
He said: “We anticipate that pension schemes will seek further diligence in this area, such as asking for, and considering, alternative sensitivities. Financial strength is one of many factors considered by trustees and sponsors when selecting an insurer. Others, in particular the impact of insurance on the member experience, will also inform this decision.”
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