Rapid shocks in store for insurers in new Bank of England tests

By Huw Jones

LONDON (Reuters) – The Bank of England said on Tuesday it will check the health of general insurers in 2025 with a ‘stress test’ that includes a rapid series of shocks, as sector capital rules are eased.

Regulators have introduced stress tests since the global financial crisis of 2008 to check if banks and insurers are holding enough capital, and uncover risks on their books, typically using “shock scenarios” spanning several years.

“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 BoE’s Prudential Regulation Authority said.

“Consequently, the PRA intends to engage with the industry including trade bodies over the next six months, with a view to providing more details of this exercise, including participation, design, and timelines, during the first half of 2024,” the it added in a statement.

The results would be disclosed on an aggregate level.

The Association of British Insurers said it supported the next test in 2025 which, if designed appropriately, can help to identify any practical issues that might arise from the scenarios.

Last month, the BoE said it would use its new powers to publish insurer-by-insurer results in its next test of life insurers in 2025, a major change that provides transparency for that has long been a feature of bank stress tests.

European Union states and the European Parliament are easing the bloc’s insurance capital rules to encourage more investment.

EU lawmakers want to give EU insurance watchdog EIOPA new powers to publish insurer-by-insurer results in stress tests – in line with current practice in EU bank stress tests.

EIOPA said in a statement that insurers are robust and mature enough to offer similar levels of transparency as banks.

“Given the expected easing of capital requirements, it is crucial to enhance our understanding of how individual companies navigate situations of stress. We therefore hope that individual disclosures will form part of the final package,” EIOPA said.

Post-Brexit Britain is also easing the Solvency II capital rules it inherited from the EU.

(Additional reporting by Sachin Ravikumar, editing by Alexander Smith and Jan Harvey)