How the PRA aims to strengthen the insurance sector in 2025

On 9 January, the Prudential Regulation Authority (PRA) issued a “Dear CEO” letter outlining its priorities for 2025. These priorities are in line with previous communications from the regulator over the past year.

In this short article we provide an overview of the key areas highlighted in the PRA’s letter.

Evolution in the insurance industry

Matching Adjustment and Internal Model

Following the successful implementation of Solvency UK and other reforms, the PRA is committed to protect policyholders, ensure firm stability, and foster a competitive market. To achieve these goals, the regulator has already taken initiatives such as establishing a new Matching Adjustment (MA) permission team and streamlining internal model application assessments.

In 2025, it plans further steps, such as partnering with the National Wealth Fund and launching the MA Investment Accelerator.

Bulk Purchase Annuities

The PRA flagged systemic risks in the expanding bulk purchase annuity (BPA) market, particularly with the increased use of funded reinsurance as noted in SS5/24. Urging insurers to maintain prudent growth, enforce pricing discipline, and enhance risk controls, PRA emphasizes that this will remain a key focus area in 2025.

General insurance risks

PRA advised general insurers to stay vigilant on underwriting, pricing, and reserving amidst uncertainties like claims inflation and cyber threats, as the regulator will continue to monitor overly optimistic assumptions in 2025.

Evaluating and maintaining resilience

Resilience measures

Given the evolving risk landscape, the PRA urges insurers to enhance resilience through accurate risk evaluation and financial stability. To this end, the Life Insurance Stress Test (LIST) 2025 will assess the resilience of 11 major UK annuity writers.

The PRA also stressed the importance of improving insurers’ liquidity positions, as outlined in consultation paper (CP)19/24. Further encouraging firms to sign up for the Bank of England’s new collateralized loan facility, designed to expand the Bank’s toolkit for supporting gilt market functioning during periods of market turmoil.

Continuing its plan to increase confidence that firms can exit the market with minimal disruption, in 2025 the PRA will work with insurers in scope of PS20/24 in preparation for the Solvency Exit Analysis (SEA) implementation, set to begin on June 30, 2026.

Focus on cyber and operational resilience

Firms have been advised to strengthen IT systems and third-party arrangements, leveraging CBEST insights as cybersecurity and operational resilience also top the PRA’s agenda.

Addressing climate-related financial risks

Finally, with growing importance of climate-related financial risks, PRA will continue to support firms’ progress in improving their management of these types of risks.

You can read the full letter here.