Insurance Stress Test 2022 feedback

The Prudential Regulation Authority, PRA, has published a Dear CEO Letter addressed at insurance undertakings to inform of the insurance stress test (IST) results 2022. According to the PRA, the key objectives of the 2022 stress tests was to assess the (financial) resilience of life insurers and general insurers, support the capacity building in the area of risk management, and provide sufficient evidence to guide the regulator in its future policy work. General insurers thereby had to assess their solvency „against a set of insured natural catastrophe (NatCat) and cyber losses“, while life insurers had to simulate the increase of longevity risk and the existence of adverse shocks facing the UK and global economy.
The outcome of the stress test reveals – in large – that insurers are quite resilient to the adverse scenarios simulated in the test. In fact, most insurers are still way beyond a 100% solvency capital requirement (SCR) after the above noted scenarios have been simulated. The following graphic depicts the outcome in this area:
Graphic 1 – Changes in aggregate SCR coverage ratio following each scenario

The key factors driving the decline in the coverage ratio of life insurers were the „credit downgrades, property shocks, and longevity improvement“, although the decline was somewhat mitigated by reinsurance and „management action“. Reinsurance coverage was also a key mitigating factor as regards the SCR coverage ratio decline of general insurers.
The stress test also revealed some weaknesses as regards model risk and corresponding assumptions, particularly in the areas of the assessment of asset liquidity and market prices in times of market stress and the quantification of losses as regards national catastrophes.
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To view the comprehensive stress test outcome as presented in the letter, please refer to the original document.