Insurance stress tests show resilience amid private credit concerns

The private credit exposure of life insurance firms, particularly those with private equity (PE) owners, has been drawing the market’s attention in recent weeks. While by the very nature of their business it is not only possible, but advisable, for life insurers to pocket the illiquidity premiums that can be available in private credit, the rapid growth of private credit markets generally has increased scrutiny of the strategy.

One key concern is that insurance companies’ disclosures are not always directly comparable since definitions of what constitutes “private credit” tend to be broad and varied. Another is the potential conflict of interest between PE owners that originate private credit assets and insurance arms that may invest in them.

Stress tests are not intended to shed light on these issues, but they are useful for assessing the resilience of insurers’ capital ratios in adverse scenarios, which include the value of their investments declining. In this context, the results of the UK’s life insurance stress test (LIST 2025) published last week were encouraging. The exercise included the UK’s 11 largest players in the bulk purchase annuity (BPA) market, which account for around 90% of annuities outstanding in the UK.

The core scenario is intended to be severe but plausible. It included features such as a 30% decline in equity and property prices, nominal rates rallying by 150bp and significant ratings downgrades. The aim is to determine how insurers’ Solvency II capital ratios would be affected both on an aggregated and individual basis. The results for the core scenario were disclosed individually, with only one firm (by far the smallest one) getting to a Solvency II ratio of close to 100% before management corrective actions (100% being the regulatory minimum insurance firms must maintain). We deem these results to be positive.

We also note that management teams have taken different approaches when it comes to capital. Some prefer to run capital ratios well above the minimum requirements while acknowledging that their ratios will be more volatile, while others have opted for having lower but less volatile capital ratios. The distinctions are important for us as credit analysts, as an issuer with a slightly lower Solvency Coverage Ratio (SCR) does not necessarily mean it is less resilient to the type of shocks being tested in the LIST 2025. Overall, the results of the test showed that on aggregate the SCR of the 11 participants would decrease from 185% to 154%.

There are two additional stress tests for which results were only published on aggregate. The first is called “asset concentrations” and consists of an additional shock to each insurer’s most material asset class (excluding sovereign and corporate exposures) within their matching adjustment portfolios. Without going into too much detail, these are essentially assets held by an individual insurer that have the potential to change their SCR materially if they move in an adverse manner. For most issuers in the UK, excluding sovereign and corporate exposures, these are equity release mortgages. This test showed that on aggregate, the result from the core scenario was virtually unchanged under the asset concentrations assumptions.

The second one is the “FundedRe recapture”. This is a situation where insurance firms pass on certain risks to reinsurers (normally longevity or mortality) but are also offloading the assets associated with these liabilities, thereby obtaining capital relief. The UK regulator has expressed some concern around concentration risk here, since most insurers go to the same reinsurers for carrying out these transactions. Therefore, this adverse scenario includes a significant reinsurance counterparty breaching their own capital requirements, which means the insurer would have to “recapture” all liabilities and collateral of their reinsurance arrangements. Under these conditions the regulator estimated insurers would recapture £12.3bn in liabilities, which resulted in the aggregate SCR falling from the core scenario’s 154% to 144%.

Overall, the outcomes are positive. Again, the results do not give insights about exposures to private credit necessarily, but they do show that balance sheets are very strong indeed on aggregate. This is encouraging as the sector exhibits resilience when exposed to severe hypothetical shocks. It also highlights that while private credit is important, the UK regulator at least believes there are more salient metrics in assessing the health of the life insurance sector.