Insurance firms will be subject to “dynamic” stress tests from 2025 as the regulator seeks to ensure the sector remains financially secure in the face of major regulatory changes.
In a statement today, the Prudential Regulation Authority (PRA), which is the Bank of England’s regulatory arm, confirmed that the tests will assess the industry’s solvency and liquidity resilience while also helping to judge the effectiveness of insurers’ risk management.
The tests will help inform the PRA’s response following a market-wide “adverse scenario”.
“The dynamic nature of the 2025 exercise represents a significant change from previous exercises and will involve simulating a sequential set of adverse events over a short period of time,” the PRA said.
The watchdog will engage with the industry over the next six months with the intention of providing further details in the first half of 2024.
The announcement comes as the industry undergoes a major regulatory shakeup.
In November last year, the government set out its plans for a post-Brexit overhaul of the EU’s Solvency II rules, with a view to unlocking billions in capital from insurance company balance sheets.
The reforms sparked a heated debate between the PRA and the government, with the PRA warning that the reforms increased the risk of insurers collapsing. Many in the insurance sector argued that the regulator was being excessively cautious.
Since then the Bank of England’s PRA has moved forward with its proposals. Last week, reforms to the so-called matching adjustment were announced, which allow insurers to recognise as upfront capital a proportion of the return they are confident of making on the assets held against long-term liabilities.