insurance stress test 2022 cover letter to firms

Our use of cookies

We use necessary cookies to make our site work (for example, to manage your session). We’d also like to use some non-essential cookies (including third-party cookies) to help us improve the site. By clicking ‘Accept recommended settings’ on this banner, you accept our use of optional cookies.

Necessary cookies

Necessary cookies enable core functionality on our website such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytics cookies

We use analytics cookies so we can keep track of the number of visitors to various parts of the site and understand how our website is used. For more information on how these cookies work please see our Cookie policy .

PRA Regulatory Digest - May 2022

Related links related links.

• Open PRA consultations

Top news and publications

• Climate capital – speech by Sam Woods

Statement on EBA Guidelines relating to the management of non-performing and forborne exposures

PS4/22 – Trading activity wind-down

News and speeches

Four Rs: Creating the conditions for long-term sustainable growth in the life annuity sector – speech by Charlotte Gerken

26 May 2022

Charlotte talks about the long-term sustainable growth of the UK’s life annuity sector. She says that potential changes to regulations for UK insurers can support this.

In her speech, she highlights the importance of:

• the responsibility of the board
• risk management

What will operational resilience look like going forward? An overview of the supervisory regulatory position − speech by Duncan Mackinnon

25 May 2022

Duncan sets out where the PRA expects firms to focus as they work towards building operational resilience by March 2025. By this time, firms will need to ensure they are resilient to disruption of their important business services, which if disrupted, could pose a risk to their safety and soundness or in certain cases to the financial stability of the UK.

He does so in the context of the international work the PRA and the Bank are involved in. He also sets out what it means to embed operational resilience.

Climate capital − speech by Sam Woods

24 May 2022

The PRA recently tested the UK’s largest banks and insurers on how prepared they are for financial risks caused by climate change. Sam Woods talks about the results at a webcast hosted by the Global Association of Risk Professionals.

Cross cutting publications and updates

This statement sets out the PRA’s approach to the European Banking Authority (EBA) Guidelines (GLs) relating to the management of non-performing exposures (NPEs) and forborne exposures (FBEs).

Banking publications and updates

This policy statement provides feedback to responses to Consultation Paper 20/21 ‘Trading activity wind-down’. It also contains the PRA’s final policy, as follows:

• Supervisory Statement (SS) 1/22 ‘Trading activity wind-down’;
• Statement of Policy ‘Trading activity wind-down’; and
• updated SS9/17 ‘Recovery Planning’.

This PS is relevant to, although may not apply directly, to all PRA-authorised UK banks, their qualifying parent undertakings and PRA-designated investment firms that are engaged in trading activities, and relevant third country branches. This PS is also relevant to policymakers and practitioners that would expect to be involved in a firm’s resolution. It is not relevant to credit unions.

Insurance publications and updates

Insurance Stress Test 2022 cover letter to firms

The PRA sent a letter to the largest PRA-regulated life and general insurers, launching the 2022 Insurance Stress Test exercise.

Your input and views on open PRA consultations and other requests closing in June 2022

CP4/22 - Regulated fees and levies: Rates proposals 2022/23

Closing date: 8 June 2022

DP1/22 – The prudential liquidity framework: Supporting liquid asset usability

Closing date: 30 June 2022

Also in the month

27 May 2022

Climate Financial Risk Forum (CFRF) Session 3 – minutes 27 April 2022

Fifth edition of the Regulatory Initiatives Grid

23 May 2022

Opening remarks at OeNB monetary policy panel by Andrew Bailey

An FPC Response - Amendments to the FPC's framework for the O-SII buffer

27 April 2022

Transforming data collection nomination process - 27 April 2022

More information

Bank Underground – a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England or its policy committees.

Bank Overground – the purpose of Bank Overground is to share our internal analysis. Each bite-size post summarises a pieces of analysis that support a policy or operational decision.

KnowledgeBank – from Interest rates and inflation through to bank failures and financial crises , KnowledgeBank uses everyday examples and engaging visuals to bring economics to life.

European and International developments – readers are referred to the following websites:

• European Banking Authority
• European Insurance and Occupational Pensions Authority
• Basel Committee on Banking Supervision
• International Association of Insurance Supervisors
• Financial Stability Board

Other prudential regulation releases

Sop – the pra’s approach to the authorisation..., sop – the pra’s approach to the authorisation and supervision of insurance branches, ps8/24 – the pra’s approach to the authorisation..., ps8/24 – the pra’s approach to the authorisation and supervision of insurance branches, non-systemic firms’ recovery planning thematic..., non-systemic firms’ recovery planning thematic review: industry feedback, pra regulatory digest - april 2024.

Back to top

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.

Popular tags

• February 2024
• January 2024
• December 2023
• November 2023
• October 2023
• September 2023
• August 2023
• February 2023
• January 2023
• December 2022
• November 2022
• October 2022
• September 2022
• August 2022
• February 2022
• January 2022
• December 2021
• November 2021
• October 2021
• September 2021
• August 2021
• February 2021
• January 2021
• December 2020
• November 2020
• October 2020
• September 2020
• August 2020
• February 2020
• January 2020
• December 2019
• November 2019
• October 2019
• September 2019
• August 2019
• February 2019
• January 2019
• December 2018
• November 2018
• October 2018
• September 2018
• August 2018
• February 2018
• January 2018
• December 2017
• November 2017
• October 2017
• September 2017
• August 2017
• February 2017
• January 2017
• December 2016
• November 2016
• October 2016
• September 2016
• August 2016

Copyright © 2024. “Womble Bond Dickinson”, the “law firm” or the “firm” refers to the network of member firms of Womble Bond Dickinson (International) Limited, consisting of Womble Bond Dickinson (UK) LLP and Womble Bond Dickinson (US) LLP. Each of Womble Bond Dickinson (UK) LLP and Womble Bond Dickinson (US) LLP is a separate legal entity operating as an independent law firm. Womble Bond Dickinson (International) Limited does not practise law. Please see  www.womblebonddickinson.com/legal-notices  for further details.

• Asset & Motor Finance
• Capital Markets
• Remuneration
• SMCR & Governance
• Consumer Credit
• Regulated Mortgages
• Enforcement & Litigation
• Financial Crime Prevention
• Fintech & Innovation
• Commercial Insurance
• Consumer Insurance
• Life Insurance
• Lloyds Market
• Investments
• Payment Services & Electronic Money
• Current Accounts
• Savings accounts
• Financial Services Timeline
• FIN. Contacts

Our use of cookies

We use necessary cookies to make our site work (for example, to manage your session). We’d also like to use some non-essential cookies (including third-party cookies) to help us improve the site. By clicking ‘Accept recommended settings’ on this banner, you accept our use of optional cookies.

Necessary cookies

Necessary cookies enable core functionality on our website such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytics cookies

We use analytics cookies so we can keep track of the number of visitors to various parts of the site and understand how our website is used. For more information on how these cookies work please see our Cookie policy .

Insurance Stress Test 2022 – Request for technical input

Related links related links.

• Letter from Anna Sweeney and Charlotte Gerken ‘Insurance Supervision: 2022 priorities’

The PRA will be conducting an insurance stress test for the largest regulated life and general insurers from May 2022.

The PRA is now launching the second request for technical input, which includes updated scenarios together with the scenario calibration, specifications, and guidance; quantitative data templates; and a ‘Results and basis of preparation’ (RBP) report.

We are seeking feedback on any aspects of the stress test from firms and other industry participants by Thursday 17 March 2022. Please send any comments to  [email protected] . If you are a firm, please include your firm’s name and FRN in the subject of the email. 

• Results and Basis of Preparation (RBP) report (PDF 0.6MB)
• Life Insurance Stress Test 2022 – Template (XLSX 0.2MB)
• Life Insurance Stress Test 2022 – Scenario specification, guidelines, and instructions (PDF 1.2MB)
• General Insurance Stress Test 2022 – Template (XLSX 0.8MB)
• General Insurance Stress Test 2022 – Scenario specification, guidelines, and instructions (PDF 2.4MB)

Other prudential regulation releases

Sop – the pra’s approach to the authorisation..., sop – the pra’s approach to the authorisation and supervision of insurance branches, ps8/24 – the pra’s approach to the authorisation..., ps8/24 – the pra’s approach to the authorisation and supervision of insurance branches, non-systemic firms’ recovery planning thematic..., non-systemic firms’ recovery planning thematic review: industry feedback, pra regulatory digest - april 2024.

Back to top

• UK Financial Services Law
• PRA - Prudential Regulation Authority
• Dear CEO Letters

Consolidated PDF

The PDF is larger than 50 pages and may take a moment to load.

Text comparison - Full text

The text generated incorporates all known amendments with given commencement dates.

If comparing more than 50 pages, this may take a moment to generate.

Dear CEO letter - Insurance Stress Test 2022 (IST 2022)

Stefan Claus Technical Head of Insurance Prudential Regulation Authority

Insurance Stress Test 2022 (IST 2022)

Following the request for technical input in our letter to firms on Thursday 20 January 2022, [January 2022:  Insurance Stress Test 2022 - Request for technical input ]  the PRA is today launching its biennial insurance stress test (IST) and is asking a number of the largest regulated life and general insurers to provide information about the impact of a range of stress scenarios on their business.

Our recent Dear CEO letter [January 2022: Letter from Anna Sweeney and Charlotte Gerken ‘Insurance Supervision: 2022 priorities’ .]  highlighted that IST 2022 is one of the key priorities for the PRA and insurers this year. The objectives of the exercise are to:

assess sector resilience to severe but plausible adverse scenarios;

guide supervisory activity; and

enhance the PRA’s and firms’ ability to respond to future shocks.

The PRA expects partic

• Request new password

Request a trial

The best way to experience better regulation is to try it - free and without obligation..

KPMG Personalization

• Financial resilience of UK Insurers

Results of the PRA’s Insurance Stress Test 2022

• Share Share close
• 1000 Save this article to my library
• View Print friendly version of this article Opens in a new window
• Go to bottom of page
• Home ›
• Insights ›

Hot on the heels of its supervisory priorities letter to insurers, which highlighted the importance of financial resilience, the PRA has published the results of its Insurance Stress Test (IST). The test applied PRA-specified scenarios to both life and general insurance (GI) firms' solvency positions in order to assess their resilience to market stresses.

Reassuringly, the PRA found that the UK insurance sector is resilient under the scenarios, subject to 'a number of mitigating measures'. There are, however, key lessons for firms to take away from the exercise, and the results should not lead to complacency. The takeaways that warrant further action or consideration by insurers are explored below.

Areas of focus for Life Insurers

for life insurers in the IST, the impacts of credit downgrades, property shocks, and longevity improvement were the largest drivers of decline in solvency coverage, with solvency ratios falling from an aggregate of 162% to 123%. Matching adjustment (MA) benefit and the transitional measure on technical provisions (TMTP) helped offset the impact of the stresses, and firms' reinsurance arrangements and management actions also helped to 'dampen' the impact.

Overall, aggregate coverage remained solvent on a regulatory basis. However, life insurers should still be concerned by the IST results as a number of them breached 100% solvency and each of the IST mitigants contains vulnerabilities that could affect coverage in a real-world event:

• Solvency II approvals — while the MA benefit increased and offset most of the corresponding falls in asset values within the MA portfolio, the deterioration on firms' balance sheets was not observed until assets started to downgrade. Therefore, the MA does not automatically reflect market fluctuations. This is one of the key concerns the PRA has been hoping to correct through the — now shelved — proposals to introduce a Credit Risk Premium (CRP) into the Fundamental Spread as part of the UK reforms of Solvency II. The PRA's analysis of the stress test results confirms that it continues to view the sensitivity of balance sheets to changes in credit spreads as an area of concern. Insurers will want to keep an eye on how the PRA will make use of the “safeguards” proposed by HM Treasury as an alternative to the CRP. In the meantime, firms may want to consider adjusting how their risk management frameworks allow them to monitor and respond to such distressed asset vulnerabilities. This includes having Board-approved quantitative risk tolerance limits, and functions that can monitor movements in assets and make interventions to stay within these agreed limits. Additionally, the TMPT benefit will expire on 1 January 2032. Given firms' reliance on this to maintain solvency, they should review their capital management plans to ensure adequate coverage as the benefit phases out and reaches the end of its 16-year tenure. When submitting phasing-in plans to the PRA, insurers should be clear on how they intend to cover the Solvency Capital Requirement (SCR) with eligible own funds.
• Reinsurance — while the PRA did not find concentrations to any specific entities or jurisdictions, it cautioned that uncertainties in claims frequency and inflation, as well as asset valuation volatility, all risked downgrading the financial performance of the reinsurance industry in 2023. Firms will want to monitor both the financial and strategic stability of their reinsurance counterparties, especially where these counterparties provide material risk mitigation services.
• Management actions — in a real-world stress, firms will not be implementing their management actions in isolation; other market participants will also be executing their plans, such as selling sub-investment grade assets. Firms should therefore re-consider the feasibility of their existing management actions and how they could be realistically implemented in a stressed environment. Without such consideration, firms could face material business and solvency challenges. It is vital that Boards are involved in the review of and, if necessary, changes to such actions, especially where the actions need to consider market liquidity and trading costs.

Areas of focus for General Insurers

Three natural catastrophe (NatCat) scenarios and three cyber scenarios were applied to GI firms in the IST. In aggregate, GI firms were able to maintain solvency above 120%. Reinsurance was the primary mitigant for losses. As for life insurers, given the uncertain outlook for reinsurers' financial performance in 2023, it is key that GI firms actively manage both their related-party and third-party counterparties — especially in light of hardening global reinsurance and retrocession markets. GI firms may therefore want to revisit their risk appetites and consider what this environment could mean for their retained risks and corresponding net losses.

Additionally, firms should note that numerous entities breached 100% solvency coverage in both the NatCat and cyber scenarios. Again, this demonstrates that impacted firms will need to take action despite the overall resilience of the sector, which for NatCat and cyber are unsurprising, given the increasing frequency and severity of events for the former risk, and the infancy of the latter. The key vulnerabilities for individual firms to address are:

• Modelling gaps — while the industry's approach to quantifying losses has become more sophisticated since the PRA's first NatCat stresses in 2015, there are gaps in quantifying secondary perils 1 and post loss amplification 2 , as well as adjusting for factors like claims inflation (the latter of which will likely not come as a surprise to the market). Firms may therefore want to reassess their models, as mis-estimation in these areas could lead to higher than anticipated losses. For example, to address claims inflation, insurers could consider how it is manifesting in their business (e.g. via court settlement costs, property repair costs etc), monitor its effects across different books of business, assess the appropriateness of existing reserving techniques (e.g. firms may want to reintroduce explicit inflation-adjusted reserving techniques and consider whether prior year reserves may be exposed to inflation), and maintain feedback loops between claims, reserving, capital modelling and underwriting / pricing.
• Maturity of expertise for a relatively new peril — while the GI firms were resilient to the PRA's cyber scenarios, individual firms varied in their assessment of scenario likelihoods, tail risks, and the implications of contract uncertainty. This latter point will chime with insurers, as the disputes over COVID-19-related business interruption cover in recent years serve as an, all too present, reminder of the risks of policy wording uncertainty. Firms offering cyber underwriting should therefore revisit these areas, as they will want robust modelling capabilities and definitive policy language if they plan to achieve their target levels of market coverage and maintain policyholder confidence

The UK insurance sector can take some comfort from its overall financial resilience to the PRA's stress test, but this should not lead to complacency at individual firm level. The IST revealed multiple vulnerabilities for both life and GI firms, and, as the PRA cautioned, the IST did not capture 'changes in the external and economic environment during 2022' — highlighting the importance of continuing stress and scenario analyses at firm level.

Insurers can expect another IST within the next year, with the PRA planning to engage with both life and GI firms in Q2 and Q3 2023 respectively on the detail of the next exercise.

Related content

Providing pragmatic and insightful intelligence on regulatory developments.

Get in touch

Connect with us.

• Find office locations kpmg.findOfficeLocations
• Email us kpmg.emailUs
• Social media @ KPMG kpmg.socialMedia
• Request for proposal

Stay up to date with what matters to you

Gain access to personalized content based on your interests by signing up today

Browse articles,  set up your interests , or  View your library .

You've been a member since

1 Not the primary, loss-driving peril 2 Factors that could increase losses, such as higher repair costs driven by materials shortage