Major UK life insurers, particularly the eleven largest firms active in the bulk purchase annuity (BPA) market, are resilient to a severe but plausible financial markets stress scenario, according to the recently published Prudential Regulation Authority (PRA) 2025 Life Insurance Stress Test (LIST 2025).
Conducted for the third time, this exercise supports the PRA’s statutory objectives of maintaining the safety and soundness of authorised firms and securing appropriate protection for current and future policyholders.
LIST 2025 is the first exercise conducted under the new Solvency UK regulatory regime implemented in 2024.
Sam Matto-Willey, head of insurer due diligence in the Aon Risk Settlement Group, stated: “The results released by the Prudential Regulation Authority (PRA) today are a valuable step forward for transparency in the UK bulk annuity market.
“‘LIST 2025’ provides greater insight into insurers’ key risk management areas of focus, and on how the UK insurance regime is designed to support effective risk management.”
This year’s core scenario incorporated a decline in risk-free interest rates, falls in equity and property prices, along with widening spreads resulting in defaults and downgrades.
According to the severe stress test, credit stress alone accounted for £12.9 billion of assets being downgraded to sub-investment grade across participating firms.
The scenario results in a reduction in aggregate surplus above the regulatory capital requirements from £30.5 billion to £21.9 billion, or 31 percentage points reduction in Solvency Capital Requirement (SCR) coverage ratio.
Additionally, in this scenario the sector’s aggregate SCR coverage ratio dropped by 31 percentage points, from a strong starting position of 185% as of 31 December 2024, to 154% post-stress.
Movement in both eligible own funds and solvency capital requirements contribute to the reduction of the aggregate SCR coverage ratio, with the eligible own funds reducing by 6% and the SCR increasing by 13%.
The PRA concluded that, owing to their strong starting capital position, the insurers have sufficient resources to withstand the shocks of this severe scenario.
The results highlight the sector’s sensitivity to interest rate down stress, credit downgrades and defaults, and property stresses.
According to the results, the core stress scenario unfolded in three stages:
- Stage 1 – Initial market shock: SCR coverage declines by 5 percentage points to 180%, indicating that firms’ solvency remains resilient to the immediate financial market shocks. In this stage, the initial reduction in SCR ratio is primarily driven by the fall in interest rates, largely offset by the impact of widening spreads.
- Stage 2 – Developing market shock: SCR coverage drops significantly to 154%, reflecting exposure to credit rating downgrades and defaults on bonds and falls in residential property values – key asset classes used to generate cash flows for annuity payments to policyholders.
- Stage 3 – Markets stabilise: SCR coverage is unchanged at 154%. This is largely due to management actions offsetting the impact of narrowing spreads and the prescribed portfolio rebalancing.
While the sector-level results are reassuring, Matto-Willey noted that risks associated with funded reinsurance remain a key focus, with the PRA considering whether further action is needed.
Furthermore, the publication of these aggregate results is viewed as a valuable step for transparency in the UK bulk annuity market. The PRA plans to publish individual firm results for the core scenario on 24 November, 2025.
“The firm-level results due to be released next week will be another key part of the toolkit to support insurer selection decisions and enhance financial strength due diligence ahead of an annuity purchase,” Matto-Willey commented.
Adding: “Today’s LIST results – which necessarily involve simplifications and limitations at a single point in time – 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.
“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.”
Martin Bird, head of Risk Settlement at Aon, expressed hope for the future release of further firm-level results, including for the funded reinsurance stress scenario.
Michelle Lister, head of life consulting at Aon, emphasised that while these results offer additional insights for insurers, context is key, and stakeholders should be warned against drawing quick conclusions that could lead to misinterpretation.
She said: “The results of the LIST exercise have been much anticipated in the bulk annuity market this year – and insurers certainly seem to have been well-prepared to respond to the significant resource commitment required to respond to the PRA’s exercise.
“The results may not affect immediate strategy for insurers, but they do offer additional insights into balance sheet stresses that could help inform future decisions around capital management, reinsurance, and investment strategy.
“While trustees and sponsors will surely be eager to see firm-level disclosures on 24 November, context will be key in analysing these results. Given the simplifications and nuance of the exercise, we would warn against drawing quick conclusions that could lead to misinterpretation.”
