In the summer of 2024, the Bank of England’s Prudential Regulation Authority announced the latest planned iteration of their insurance stress tests – now branded Life Insurance Stress Tests (LIST) – which has now begun for some of the larger insurers in the country. Greg Winterton caught up with Roger Lawrence, Managing Director at W L Consulting, to get his views on the LIST and its potential impact on the market.
GW: Roger, given the UK’s evolving macroeconomic landscape, how does LIST account for emerging systemic risks such as prolonged stagflation or a sharp correction in the gilts market, and do you believe the stress parameters adequately reflect real-world tail risks?
RL: It’s important to remember that the gilt crisis was one of the reasons that LIST, as it now is, exists in the first place, as it exposed vulnerabilities that many had assumed were unlikely to materialise in such a short time frame. Earlier stress tests were conceived in the age of QE and often focussed on “low for longer” scenarios and how insurers might perform in a continuing era of low interest rates and inflation. They also included asset shock scenarios, but the gilt crisis has exposed vulnerabilities. With a mushrooming pension risk transfer (PRT) market, a range of new risks are developing, so these new tests are to broadly simulate one scenario, a severe global recession.
GW: The UK’s life insurance industry has a not insubstantial exposure to illiquid assets, particularly in with-profits and annuity portfolios. To what extent do you think LIST’s liquidity scenarios challenge the industry’s ability to meet policyholder obligations under extreme conditions?
RL: I think the key question here is whether its liquidity scenarios genuinely push insurers to confront extreme but plausible redemption pressures, or whether the exercise remains a largely theoretical assessment of liquidity buffers. The events of the LDI crisis in 2022 demonstrated that even well-capitalised institutions can face unexpected liquidity crunches even in the deepest liquid markets when market conditions deteriorate rapidly. Illiquids are not explicitly captured in the LIST but varying degrees of credit downgrade together with default rates are applied based on quality. Portfolios of securitised illiquids, especially within the matching adjustment, are assumed to need restructuring.
GW: From a prudential regulation standpoint, how does LIST compare with previous stress-testing frameworks, such as Solvency II’s Own Risk and Solvency Assessment (ORSA), in terms of sophistication and predictive validity?
RL: LIST represents an evolution of previous stress-testing approaches, but it sits within a broader framework that includes Solvency II’s Own Risk and Solvency Assessment (ORSA). While ORSA is an internal exercise, tailored to the risk profile of each insurer, LIST provides a standardised, regulator-led benchmark that allows for industry-wide comparison. One of the key differences is that LIST, by design, is more prescriptive in its assumptions, which can be both a strength and a limitation. The challenge is that while standardised stress tests provide valuable insights at a sector level, they may not fully capture firm-specific nuances in risk management. That being said, LIST’s methodology continues to evolve, and its ultimate effectiveness will depend on how well it complements existing risk assessment frameworks without becoming a box-ticking exercise. For the first time, the results of the primary test will be made public at company level rather than in aggregated form which will need sensitive handling by the regulator.
GW: How do you expect LIST results to influence future regulatory capital requirements, particularly with the ongoing Solvency II reforms, and could this lead to a more UK-specific prudential regime diverging from the EU model?
RL: This year’s tests are a staged asset shock test, the so-called ‘1 in 200 years’ event which, whilst being calibrated using new real-world parameters, will add to the regulator’s understanding of company resilience. This is the primary test for the regulator to assess whether their capital requirements are sufficiently robust or not. However, it is joined by two, non-published additional tests which are designed to improve the regulator’s understanding of emerging risk. The first, which concentrates further on the matching adjustment asset concentrations, especially equity release mortgages, is a matter of continuing regulatory concern since Solvency II was introduced in 2016. The second is a study of funded reinsurance which has been driven by the PRT market.
The results could have a material influence on future regulatory capital requirements, particularly in the context of the UK’s ongoing Solvency II reform agenda. The government has signalled a willingness to diverge from the EU regime in certain areas, such as the treatment of matching adjustment portfolios and the recalibration of risk margins. If LIST were to reveal significant capital vulnerabilities in specific areas – whether related to longevity risk, credit risk, or liquidity concerns – regulators could respond by adjusting capital buffers or imposing additional stress-based capital add-ons that will further reform ‘Solvency UK’. The challenge, as always, will be to strike the right balance: a stress-testing regime that is overly punitive could stifle innovation and investment, whereas one that is too lenient might fail to capture latent risks.
GW: Lastly, Roger, beyond quantitative solvency metrics, does LIST incorporate qualitative assessments, such as the effectiveness of insurer risk governance frameworks and management responses under stress conditions? If not, do you think this is a missed opportunity?
RL: There is an important discussion to be had about whether LIST sufficiently incorporates qualitative factors such as governance, risk management effectiveness, and strategic decision-making under stress. While capital adequacy is a critical pillar of financial resilience, the ability of insurers to respond dynamically to crises – whether through contingency planning, operational resilience, or risk governance – can often be just as important. The banking sector has long recognised this, with regulatory stress tests placing increasing emphasis on management actions and the credibility of crisis response plans. If LIST does not currently embed these qualitative dimensions in a meaningful way, that would indeed be a missed opportunity. A well-designed stress test should not only evaluate a firm’s balance sheet strength but also its institutional preparedness for navigating extreme scenarios in practice.
Roger Lawrence is Managing Director at W L Consulting