Bank of England to Conduct 2025 Stress Tests on General Insurers with Rapid Shocks

The Bank of England (BoE) has announced plans to assess the health of general insurers in 2025 through a rigorous 'stress test,' incorporating a rapid series of shocks. This move comes as regulators are easing capital rules for the insurance sector.

Since the global financial crisis of 2008, regulators have employed stress tests to gauge whether banks and insurers maintain adequate capital reserves and to identify potential risks on their balance sheets. Typically, these tests involve subjecting financial institutions to "shock scenarios" that span multiple years. However, the BoE's Prudential Regulation Authority (PRA) revealed that the 2025 exercise will introduce a dynamic element, representing a significant departure from past tests. It will simulate a sequential set of adverse events over a condensed timeframe.

The PRA has stated its intention to collaborate with the insurance industry and trade bodies over the next six months. The objective is to provide more comprehensive details about the exercise, including participation criteria, design specifications, and timelines, during the first half of 2024. The results will be disclosed at an aggregate level.

The Association of British Insurers (ABI) has expressed support for the 2025 stress test, provided it is appropriately designed. The ABI believes that such tests can serve to identify practical issues that may arise from the scenarios presented.

In a notable development, the BoE recently announced that it would exercise its new powers to publish insurer-specific results in the upcoming life insurer stress test in 2025. This move toward transparency in insurance stress tests aligns with established practices in banking stress tests.

Meanwhile, in the European Union (EU), lawmakers are easing the bloc's insurance capital rules to stimulate greater investment. They are also seeking to grant the European Insurance and Occupational Pensions Authority (EIOPA) the authority to publish insurer-specific results in stress tests, mirroring the existing approach in EU bank stress tests.

EIOPA has affirmed its confidence in the robustness and maturity of insurers, suggesting that they are well-equipped to offer transparency levels similar to those of banks. The organization emphasized the importance of individual disclosures, particularly in light of the anticipated relaxation of capital requirements.

In the post-Brexit landscape, the United Kingdom is also in the process of easing the Solvency II capital rules, which it inherited from the EU, as part of its regulatory reforms in the insurance sector. These developments underscore the evolving regulatory landscape for insurers and their increasing focus on resilience and transparency in the face of potential stress scenarios.