The UK Prudential Regulation Authority's 2025 Life Insurance Stress Test demonstrates that the sector maintains strong capital levels, according to analysis from Fitch Ratings.
However, actual market stress could produce different results if interconnectedness between markets exceeds what the test assumes, potentially creating spillover effects that the exercise did not fully capture.
Credit downgrades, credit migrations and property valuation declines created the largest hits to solvency ratios in the stress test. Asset portfolios across insurers remain diversified, but equity release mortgage exposures present a vulnerability for some carriers under severe stress.
Just Group, which holds among the highest ERM exposures in the sector, has mitigated this exposure through modest loan-to-value ratios and tight controls, according to Fitch's analysis.
Fitch rates eight UK insurance groups active in the bulk annuity market, all maintaining Insurer Financial Strength ratings in the AA or A categories and scoring 'Extremely Strong' on Fitch's Prism Global model.
That said, the UK bulk annuity market has faced headwinds in 2025, with life insurers writing approximately £10 billion in bulk annuities during the first half, down significantly from £15 billion in the same period last year.
The decline reflects lower transaction volumes, tighter credit spreads, and heightened competition among market participants. New business profitability fell in H1 2025 despite some offset from profit releases within existing portfolios and operational cost efficiencies.
The stress test did not explicitly account for potentially higher valuation and credit risks associated with private assets, a growing exposure for UK life insurers that may require attention in future system-wide testing.
Fitch notes that credit deterioration across asset classes can be highly correlated, meaning that focusing on concentrated exposures in the stress test may underestimate how losses could transmit across different asset types.
In actual stress scenarios, insurers could deploy a broader range of management tools including reinsurance, risk transfers and capital injections to address solvency pressures.
The test limited management actions to ensure consistency and comparability of results across firms. Individual insurer results varied significantly due to differences in balance-sheet structures, business models and starting solvency positions.
Insurers with substantial ring-fenced with-profits surpluses, including The Prudential Assurance Company, Phoenix Life Limited and Aviva Life & Pensions UK Limited, recorded dampened stress test results. Regulatory solvency calculations exclude own funds exceeding the solvency capital requirement for ring-fenced books, though these surpluses can absorb losses within those separate funds.
Three insurers with very strong starting solvency positions – Rothesay Life, Pension Insurance Corporation PLC and Legal and General Assurance Society – remained among the highest post-stress solvency ratios, starting above 200%.
However, these firms also experienced some of the largest declines, reflecting how larger own fund bases amplify solvency ratio movements and their greater exposure to bulk annuity business.
The funded reinsurance stress test centered on the largest counterparty and did not capture broader interconnectedness among reinsurers. A single reinsurer failure could trigger additional failures, and collateral pools may move in tandem, particularly if assets within them are similar in nature.
Elsewhere, the Bank of England has stepped up scrutiny of offshore reinsurance structures, noting that UK insurers completed at least £6 billion of funded reinsurance deals as of last year, with the market experiencing rapid growth.
Demand for bulk annuities is forecast by consultancy LCP to reach £500 billion over the next decade, a trajectory that is drawing US capital groups into the UK sector and heightening regulatory concerns over capital arbitrage and interconnectedness risks.
Simultaneous recaptures across correlated portfolios during market stress could magnify risks beyond the test's parameters. Insurers with lower post-stress solvency ratios appear more vulnerable to a funded reinsurance recapture scenario.
Applying an industry-wide 10 percentage point solvency reduction from funded reinsurance recapture pushes some insurers close to 100% solvency ratio, indicating that thinner buffers and greater reliance on funded reinsurance could increase risks during severe stress.
The funded reinsurance recapture findings are expected to influence future PRA policy initiatives, including ongoing discussions to develop alternative capital options for life insurers.
