The PRA issued a Dear CEO letter to life and general insurers on 9 January 2025, setting out its supervisory priorities for the year ahead.
The PRA’s key priorities build on previous years, focusing on adapting to ongoing changes in the external context for life and general insurers. It emphasises the importance of strong governance, risk management, and controls to effectively manage risks. Additionally, its priorities incorporate the outcomes of the Solvency II review and the necessary changes for firms and the PRA to achieve the goals of these major reforms.
This year the PRA groups its priorities into two themes: 1) Evolution in the insurance industry; and 2) Evaluating and maintaining resilience.
Evolution in the insurance industry
Solvency UK implementation
Following the implementation of all Solvency UK reforms in 2024, this year the PRA will prioritise ensuring that these reforms are embedded. Additionally, the PRA plans to continue to collaborate with the government and other stakeholders to identify steps to help insurers fully benefit from the reforms, including engaging with the National Wealth Fund and creating a Matching Adjustment Investment Accelerator.
Bulk purchase annuity market and funded reinsurance
The PRA continues to observe rapid growth in the UK's bulk purchase annuity market due to high demand for corporate defined pension scheme risk transfer solutions. It expects life insurers to manage growth prudently, and maintain pricing discipline and robust risk management standards amid competition.
The PRA published SS5/24 in July 2024, outlining its expectations on the use of funded reinsurance (see our Hot Topic). In the Dear CEO letter the PRA notes that firms' self-assessments show they are not fully meeting supervisory expectations. While many firms have remediation plans, further work is needed, in areas such as the insufficiency of internal investment limits to prevent systemic risk. The PRA expects firms to quickly address these gaps, and it makes clear that if risk management practices remain inadequate, it will consider further use of its powers.
Cyclicality in the general insurance market
The PRA expects general insurers to stay aware of their position in the underwriting and reserving cycles and to monitor changes in pricing conditions. While uncertainties like economic inflation have lessened, issues like claims inflation, natural catastrophe losses, geopolitical risks, and cyber threats persist. It urges firms to maintain strong reserving standards and underwriting discipline through 2025.
The PRA continues to see some firms using overly optimistic profitability assumptions, impacting Solvency Capital Requirement calculations. These assumptions often do not reflect actual experiences. The PRA will continue to scrutinise these assumptions, particularly if they deviate from prior experience.
This year the PRA will analyse new cyber underwriting reporting data. It reminds firms that they should effectively identify, quantify, manage, and monitor this risk across their insurance portfolios, including the robustness and appropriateness of scenario-testing considering recent events and new risk drivers such as artificial intelligence.
Evaluating and maintaining resilience
Life insurance stress test
In July 2024, the PRA released its Approach Document for the Life Insurance Stress Test 2025, which aims to assess the financial resilience of the largest UK life insurers. For the first time, the PRA will publish (expected Q4 2025) individual stress test results for eleven major annuity writers, along with aggregate results, to enhance transparency and understanding of firms' financial positions under stress.
Liquidity resilience
The PRA confirms that this year it will continue to engage with relevant firms on the proposed liquidity reporting requirements set out in CP19/24 – Closing liquidity reporting gaps and streamlining Standard Formula reporting (see our At a glance). It also confirms that it will follow-up on the thematic review it conducted last year on life insurers’ liquidity risk appetites, where it identified approaches that would benefit from further development.
Solvent exit planning
The PRA published its final policy on solvent exit planning for insurers on 18 December 2024. This policy, set to come into force on 30 June 2026, will require most insurers to prepare a Solvent Exit Analysis. This plan must cover a firm’s ability to execute an orderly, solvent exit if necessary. This year the PRA will collaborate with firms to help them understand its expectations (see our At a glance).
Operational resilience, cyber security and third-party risk
The PRA reminds firms that by March 2025, they must demonstrate their ability to remain within impact tolerances for all important business services during severe but plausible disruptions. It emphasises that operational resilience should be a key consideration for boards and executives when planning major change programmes, making strategic business decisions, or entering into new third (sometimes fourth) party relationships.
The PRA encourages firms to utilise its CBEST Thematic Reports to improve their cyber resilience capabilities and to be aware of the thematic findings from the forthcoming Cyber Stress Test, which will be published later this year. To further enhance the sector's cyber resilience capabilities, the PRA plans to begin consulting with the FCA in H2 2025 on policy related to the management of Information and Communication Technology (ICT) and cyber risks.
Financial risks arising from climate change
The PRA considers firms are yet to fully embed its climate expectations, with further progress on scenario analysis and risk management required. The PRA is planning to consult on an update to SS3/19 this year.
As the challenging risk environment shows no signs of easing, insurers should ensure they continue to assess the appropriateness of their risk management frameworks and their internal controls.
Insurers should ensure that they put sustainability at the heart of their growth strategies when seizing opportunities presented by the changing economic, regulatory and technological environment.
Insurers should engage with and provide feedback to the PRA as the regulator continues to implement regulatory reform, and develop other regulatory expectations (such as liquidity reporting).
Embed Solvency UK reforms: Ensure that all changes resulting from the Solvency UK reforms are fully integrated into business processes. Firms should collaborate with the PRA and other stakeholders to maximize benefits from these reforms, such as engaging with initiatives like the Matching Adjustment Investment Accelerator.
Enhance risk management and compliance: Address gaps in risk management practices, particularly with regards to the use of funded reinsurance. Relevant firms should ensure compliance with PRA expectations as outlined in SS5/24, and make improvements such as strengthening internal investment limits, to mitigate potential systemic risk. Firms should ensure that their control frameworks keep pace with changes in business practice and with evolving transaction features such as long price locks, trustee termination options and in specie premiums.
Maintain underwriting and reserving discipline: In the general insurance market, firms should be vigilant about their underwriting and reserving practices, taking into account persistent risks such as claims inflation and natural catastrophe losses. Firms should scrutinise profitability assumptions to ensure they align with actual experiences.
Prepare for Life Insurance Stress Test: Prepare for the 2025 stress test by evaluating and enhancing financial resilience. Major annuity writers should anticipate the publication of individual results, and use this transparency to strengthen financial strategies.
Enhance operational and cyber Resilience: Demonstrate the ability to operate within impact tolerances by March 2025. Firms should also utilise CBEST Thematic Reports and consider the forthcoming Cyber Stress Test publication to improve cyber resilience. Additionally, firms will want to stay close to policy development on the PRA and FCA upcoming consultation on managing ICT and cyber risks.
“The PRA's 2025 insurance priorities highlight the need for insurers to adapt to regulatory changes by continuing to strengthen governance and risk management frameworks. By integrating Solvency UK reforms and enhancing operational and cyber resilience capabilities, insurers can better navigate today's rapidly evolving risk landscape and capitalise on new market opportunities.”
Andy Moore
Partner, PwC
Insurers should expect ongoing engagement from supervisory teams on the areas covered in the letter as well as specific feedback, including through the periodic summary meeting process.
The PRA issued its final policy (PS20/24, SS11/24) on solvent exit planning for insurers on 18 December 2024. Following responses to its consultation, the PRA made several changes and clarifications to its expectations. The most significant of these changes are the scope and the implementation date of the new requirements.
The PRA published a consultation paper (CP19/24) on 11 December 2024, proposing new liquidity reporting templates for large insurance firms, with an expected implementation date of 31 December 2025.
PwC’s summary of the PRA’s final policy on firms’ funded reinsurance arrangements.
