How the results from EIOPA’s insurance stress test can help UK insurers prepare for LIST 2025

The European Insurance and Occupational Pensions Authority (EIOPA) published the results of its 2024 Insurance Stress Test which evaluated the resilience of the European insurance sector against potential economic and financial challenges arising from escalating geopolitical tensions.

We take a closer look at the results and breakdown what this means for insurers.

What the results reveal

The results show that the overall European insurance industry is well capitalised, but there are some individual insurers who would need to take significant management actions in a stressed scenario.

Key points

• Only two insurers in the European Union use a Matching Adjustment to reduce Solvency requirements. In contrast, all current UK BPA providers use a Matching Adjustment. This shows a widespread difference in reserving approaches between UK and European life insurers, especially for long-dated annuity liabilities.
• European insurers would have had to sell almost €600 billion assets in a stressed scenario. This highlights the importance of insurer liquidity, which is being looked at in more detail by the UK Prudential Regulatory Authority (PRA) in 2025.

Colin Haines, 4most’s Head of BPA Market Solutions commented:

“EIOPA report arrives at a pivotal moment, affirming the resilience of insurers across the European Union while offering critical insights for the wider industry.

For UK BPA providers, the transition to Solvency UK and next year’s Life Insurance Stress Tests (LIST) presents a unique opportunity to assess their position against this benchmark. This comparison is not only timely but also vital for understanding strategic positioning within the global insurance market.”

In relation to the calculation of Technical Provisions and Capital Management, Colin adds:

“A key takeaway from EIOPA’s report is the difference in how life insurers calculate Technical Provisions and Solvency Capital Requirements, especially for long-dated liabilities. While UK BPA providers heavily rely on Matching Adjustments to optimise their capital efficiency, the European Economic Area’s preference to use a Volatility Adjustment highlights a fundamental difference in risk management strategies. This raises essential questions about the long-term impact of these approaches on investments, stability and competitiveness.  The new global Insurance Capital Standard (ICS) for internationally active insurance groups provides a good opportunity to bring this all together.”

In relation to insurer liquidity, Colin adds:

“The finding that European insurers might have to sell almost €600 billion of assets in a stressed scenario brings the issue of insurer liquidity sharply into focus. For the UK, the PRA’s work on insurer liquidity in 2025 will be crucial in ensuring the sector remains resilient to potential market disruptions.”

Further information and 4most analysis

Given the forthcoming Life Insurance Stress Test (LIST) in the UK, we take a closer look at  the following topics.

• Stress test coverage
• Stress Positions
• Matching Adjustments
• Use of Internal Models
• Liquidity

Stress test coverage

The stress test covered 48 insurers from 20 countries (approximately 75% of the European Economic Area (EEA) insurance market based on total assets).

The insurers had total assets of €6.4 trillion, backing €5.8 trillion of liabilities. 51% of the liabilities were for Life & Pensions businesses, including Bulk Purchase Annuities (BPA).

4most has offices in Ireland and the Netherlands and has clients in the Nordic region. The EIOPA study is of particular interest to 4most as it included one insurer from Ireland (Irish Life), four from Netherlands (NN Group, Achmea, ASR, Athora), and eight from Nordics (Danica, PFA, OP, Skandia, Nordea Life, If, Storebrand, KLP).

The UK LIST in 2025 will focus on 11 Bulk Purchase Annuity (BPA) providers from nine different insurance business groups. Insurers will be doing their stress test calculations and reporting in the first half of the year, and the UK Prudential Reporting Authority will release results later in 2025. For the first time, results will be released at individual entity level.

Stress Positions

The overall pre-stress solvency ratio was 222%. Under the two stress scenarios modelled, the average solvency ratios fell to 123% and 140%, respectively.

These show that insurers had sufficient resources to withstand the shocks of the extreme but plausible stress test scenario.

However, eight insurers (17% of all insurers) saw their solvency ratio fall below 100% in a post-stress scenario. These insurers would have to apply management actions for 100% coverage to be maintained. Management actions can include selling assets, moving to lower-risk assets, accessing credit lines and reinsurance, cutting dividends, and reducing management bonuses and variable pay.

The stress test showed that a re-intensification or prolongation of geopolitical tensions could have a significant impact on insurers, resulting in a drop of capital of over €270 billion in the scenarios tested.

Matching Adjustments

EEA and UK insurers have options to use a Volatility Adjustment and Matching Adjustment to reduce Technical Provisions and Solvency Capital Retirements

The majority, 70%, of the EEA stress participants use a Volatility Adjustment but only two made use of a Matching Adjustment.

In contrast, analysis by 4most shows that all the UK BPA insurers make use of a Matching Adjustment at end 2023 revealing a marked difference in approach to Solvency calculations by UK and EEA life insurers. Most UK BPA insurers used a Matching Adjustment in the range of 1-2% a year at end 2023. This had a material impact on UK insurer solvency positions. In contrast, Irish BPA insurers used Volatility Adjustments of around 0.2% a year, resulting in a much smaller impact.

Use of Internal Models

Insurers have two main methods of calculating capital requirements under Solvency II:

1. The Standard Formula – a standard set of rules and assumptions.
2. Internal Models – that allow insurers to develop their methods and assumptions but also result in more accurate calculations.

Internal Models can however be very expensive and complicated to implement. Insurers can use a Partial Internal Model (meaning they may use their own models for some parts of their business, and the Standard Formula for others) or a Full Internal Model (where an internal model is used for the whole business).

69% of the insurers used the Solvency II Standard Formula. However, these insurers represent only 51% of assets, indicating that larger insurers are more likely to use their own Internal Models for reserving and solvency calculations.

Most of these insurers use a Partial Internal Model, with only two out of 48 using a Full Internal Model.

Liquidity

Insurer liquidity is very important in order for insurers to have sufficient cash to pay claims and pensions as well as provide collateral for hedging and reinsurance contracts.

In the UK, the Prudential Regulation Authority (PRA) is looking to tighten the rules for UK insurers. The PRA issued consultation paper CP19/24 on 11 December 2024 and is looking to put in place new reporting requirements for UK insurers by the end of 2025.

The PRA is concerned that insurers may have cash strains during times of market stress (as experienced during the 2020 Covid-19 pandemic and the 2022 UK LDI crisis). It is also concerned that insurers were not able to provide accurate data on cash holdings in a timely manner which made it hard to assess liquidity risk exposures.

The EIOPA exercise did not reveal vulnerabilities in the liquidity position of the participants. Although insurers’ cash holdings do not fully cover outflows, they hold sufficient liquid assets to meet the liquidity needs generated by the shocks.

However, the EIOPA report shows that EEA insurers’ cash holdings at December 2023 were not enough to cover expected outflows in Q1 2024 in the stressed scenario, and insurers would have had to sell almost €600bn assets (mainly government bonds and listed equities) in the stressed scenario, compared to €300bn in the baseline unstressed scenario.

Want more information?

Get in touch if you’d like to discuss these results in more detail – info@4-most.co.uk.