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Bank of England to Conduct Stress Test on General Insurers in 2025

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The Bank of England (BoE) has announced that it will conduct a ‘stress test’ on general insurers in 2025, as part of an effort to assess the sector’s financial health. This move comes as capital rules for the industry are being eased. Stress tests have been implemented by regulators since the global financial crisis of 2008, to ensure that banks and insurers are holding sufficient capital and to identify any risks in their portfolios.

The upcoming 2025 exercise will differ from previous tests, as it will involve simulating a rapid series of adverse events over a short period of time. The BoE’s Prudential Regulation Authority (PRA) intends to engage with the industry, including trade bodies, over the next six months to provide more details on the exercise by the first half of 2024.

The results of the test will be disclosed at an aggregate level, meaning that individual insurer performance will not be made public. However, this marks a significant departure from the usual practice, as the BoE recently announced that it would publish insurer-by-insurer results in its next test of life insurers in 2025. This move towards transparency aligns with the current practice in EU bank stress tests.

The European Union (EU) is also in the process of easing its insurance capital rules to encourage more investment. EU lawmakers are seeking to grant the EU insurance watchdog, EIOPA, new powers to publish insurer-by-insurer results in stress tests. EIOPA believes that insurers are robust and mature enough to offer similar levels of transparency as banks. It emphasized the importance of understanding how individual companies navigate stressful situations, especially considering the expected easing of capital requirements.

Additionally, post-Brexit Britain is relaxing the Solvency II capital rules inherited from the EU. This move, coupled with the changes in EU insurance capital rules, signals a broader trend towards easing regulations in the insurance sector.

The upcoming stress test on general insurers in 2025 reflects the BoE’s commitment to ensuring the stability and resilience of the insurance industry. By subjecting insurers to a series of adverse scenarios, regulators aim to identify potential vulnerabilities and address them in a timely manner. The increased transparency in publishing insurer-by-insurer results demonstrates a move towards greater accountability and risk management in the sector.

As the industry and regulators continue to navigate the changing landscape of post-Brexit Britain and the evolving EU regulations, stakeholders will closely monitor the results of the stress tests. The findings will provide valuable insights into the financial health of the general insurance sector and inform future regulatory decisions.

More detail via Reuters here… ( a )

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