Insurance and reinsurance: New year, new priorities

Last week the PRA published a Dear CEO letter outlining its 2025 supervisory priorities for the UK insurance sector. The PRA focuses its priorities on the continuing evolution of the insurance industry and evaluating and maintaining resilience.

The priorities for 2025 include:

• implementing Solvency UK reforms and issuing a final policy on insurance special purpose vehicles;
• developments in the market for bulk purchase annuities (BPA), including funded reinsurance;
• cyclicality in the general insurance market;
• stress testing;
• liquidity;
• solvent exit planning for insurers;
• operational resilience, cyber security, and third-party risk; and
• climate risk management.

These areas of focus are a further development of priorities previously selected by the PRA in recent years.

Solvency UK implementation

The end of 2024 was significant for Solvency II reform in the UK. At the end of 2024, the PRA concluded its phased consultation approach to the Solvency II review and the final rules came into force signalling the beginning of a hopeful period of long-term investment and growth in the UK.

In parallel, the PRA signalled that it would continue to evolve its prudential regulatory framework for the insurance sector in 2025 and will prioritise ensuring that these reforms are embedded to help achieve their objectives to: (i) spur a vibrant, innovative, and internationally competitive insurance sector; (ii) protect policyholders and ensure the safety and soundness of firms; and (iii) support firms to make long-term investments to support growth.

Streamlining and reducing administrative burden are key features of the Solvency II reforms in the UK, and the PRA priorities demonstrate the PRA’s drive to fully embed the changes and to work with and support firms in capitalising on the reforms. The new Matching Adjustment (MA) permissions team will allow the PRA to assess MA applications more quickly. The PRA has also streamlined its approach to internal model application assessments.

BPA market developments and funded reinsurance

Following rapid growth in the BPA market, and increasing complexity of BPA transactions (for example, long price locks, trustee termination options, and in specie premiums), the PRA continues to be concerned that this complexity and lack of transparency in funded reinsurance may increase the fragility of parts of the global insurance sector and pose systemic risks if not addressed.

The PRA expects insurers to ensure that their risk management and control frameworks keep pace. It expects insurers to proactively and prudently manage their capacity to support the growth and to ensure that high levels of competition for BPA business do not weaken their pricing discipline and incentivise weaker risk management standards. Insurers may be required to implement new risk management approaches or limit their exposure to the evolving features of BPA transactions.

The PRA notes that firms’ self-assessments submitted last year show that firms are not yet fully meeting the PRA’s supervisory expectations in relation to funded reinsurance and that, whilst some remediation plans are in place, insurers are expected to make rapid progress in addressing any gaps that the PRA identifies. The PRA will consider the further use of its powers if insurers do not achieve the required risk management practices.

A funded reinsurance recapture scenario will also be included in the 2025 LIST.

Cyclicality in the general insurance market

Financial resilience has been a key priority for the PRA for some time now. This theme continues to be a priority for the PRA in 2025, with insurers expected to focus on the adequacy of reserving standards and to maintain underwriting discipline, given climate-related and political uncertainties. A particular area of focus for firms should be the adequacy of their risk management and control frameworks.

The PRA also intends to focus on cyber underwriting risk. Insurers should be able to identify, quantify, manage, and monitor sources of this risk across the breadth of their portfolios, including considering the robustness of scenario-testing in light of developing risk drivers such as artificial intelligence.

Life Insurance Stress Test (LIST)

In July 2024, the PRA published three objectives for the LIST 2025 exercise which is expected to launch this month:

1. to assess sector and individual firm resilience to severe but plausible events;
2. to strengthen market understanding and discipline through individual firm publication; and
3. to improve insight into risk management vulnerabilities.

The PRA has now confirmed that it will publish individual firm results for eleven major annuity writers, as well as aggregate results together with additional context to support transparency and enhance understanding as to how firms’ financial positions evolve in stress in Q4 2025.

The PRA expects insurers involved in the LIST exercise to engage fully and provide comprehensive responses so as to facilitate these publications.

Liquidity resilience

The PRA will continue focusing on improving liquidity reporting by insurers. In CP19/24, published in December 2024, the PRA proposed liquidity reporting requirements for major life insurers as part of its response to prominent market stress episodes such as the ‘dash for cash’ at the onset of Covid-19 and the liability-driven investment crisis in September 2022. The PRA will continue to engage with relevant insurers on these proposals in 2025.

The PRA will also continue to encourage relevant insurers to sign-up for the Bank of England’s new collateralised loan facility for non-banks, so as to expand the Bank’s toolkit for supporting gilt market functioning during market turmoil.

Solvent exit planning for insurers

From 30 June 2026, new policy requirements will require most insurers to prepare a Solvent Exit Analysis covering their ability to deliver a solvent exit.

In 2025, the PRA will work with relevant insurers to support understanding of the PRA’s expectations in this regard.

Operational resilience, cyber security, and third-party risk

Operational resilience continues to be a key priority for the PRA.

By March 2025 firms need to show they can remain within impact tolerances for all their important business services throughout severe but plausible disruptions. The PRA expects insurers to have made significant progress already to strengthen their response and recovery capabilities in relation to cyber threats, vulnerabilities exposed by legacy infrastructure, and disruptions to material third party services.

The PRA expects boards and executives to continue to consider operational resilience as part of any key business decisions or planning, whilst insurers should maintain robust oversight of major outsourcing and third-party risk management providers, including intra-group operational arrangements. Insurers should also be mindful of the financial health of their suppliers and their data security.

The PRA also encourages all insurers to enhance their cyber resilience capabilities by reference to the PRA’s CBEST Thematic Reports and to be mindful of the thematic findings from the Cyber Stress Test, which will be published later in 2025.

Climate change

The PRA published its climate expectations in April 2019 in Supervisory Statement 3/19. Those expectations included embedding the consideration of financial risks from climate change in governance arrangements and incorporating such risks into existing financial risk management practice. The PRA has identified that insurers are yet to fully embed these expectations and therefore, in 2025, will continue to engage with insurers where physical climate risks are most material.

The PRA also aims to consult on an update to Supervisory Statement 3/19 to support firms’ progress in improving their management of climate-related financial risks.