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The PRA’s insurance sector supervision priorities for 2025

Briefing
31 January 2025
3 MIN READ
1 AUTHOR

The PRA has outlined its supervision priorities for 2025 in respect of the insurance sector, building on the regulatory themes from its 20231 and 20242 agendas. These priorities reflect the evolving insurance landscape and the completion of significant reforms stemming from the Solvency II review, marking a transition to Solvency UK.

In this article, we explore the key areas of focus for the year ahead:

Evolution in the Insurance Industry

Following the conclusion of the Solvency II review, the PRA is shifting its priorities in 2025 to the effective implementation and embedding of Solvency UK reform. Notable developments include:

Matching Adjustment

The PRA has streamlined Matching Adjustment application assessments, expanding investment opportunities for firms. Additionally, a new Matching Adjustment Investment Accelerator initiative is being developed to help firms leverage the potential of the reforms.

Internal Model Application Assessments

Adjustments have been introduced to allow pragmatic solutions for modelling limitations, enabling firms to use model limitation adjustments to ensure the Solvency Capital Requirement complies with calibration standards.

New Entrants and Third-Country Branches

The PRA has introduced a “mobilisation” regime designed to support the process for new insurers entering the market. Additionally, it has reduced capital requirements and simplified reporting obligations for third-country branches.

Cyclicality in the General Insurance Market

The PRA advises insurers to remain vigilant to pricing and reserving cycle dynamics, maintaining underwriting discipline and robust reserving standards.

While some firms have improved, the PRA highlights ongoing concerns about overly optimistic future profitability assumptions in internal models, which are not always justified against underwriting experience.  Firms are urged to validate and justify profitability assumptions in their models, to avoid material impacts on Solvency Capital Requirement calculations.

The PRA sets out that uncertainty in rates persists due to recent natural catastrophes, global conflicts, and high legal liability costs. The PRA cautions firms against assuming significant near-term reductions in reinsurance rates or retained risk levels.

Finally, the PRA will continue to focus on cyber underwriting risk, analysing the new cyber underwriting reporting data. Firms must effectively manage and monitor these risks, ensuring robust scenario-testing that accounts for recent events and emerging factors like AI.

Liquidity Resilience

The PRA is increasing its focus on insurers’ liquidity positions following recent market stresses such as the “Dash for Cash” at the beginning of the pandemic and liability-driven investment crisis following the 2022 mini-budget. Its efforts in 2025 will include:

  • Enhanced liquidity reporting;
  • Encouraging insurers to use the Bank of England’s collateralised loan facility; and
  • Engaging with insurers on proposed reporting requirements to close liquidity reporting gaps and improve data quality.

Solvent Exit Planning

Starting from June 30, 2026, new policy requirements will require most insurers to prepare a Solvent Exit Analysis plan, covering their ability to deliver an orderly and solvent exit if required. In 2025, the regulators will begin working with insurers in scope of PS20/24 to help them understand these expectations ahead of the implementation date. See our article here for more on the PRA’s solvent exit policy.

Operational Resilience

By March 2025, all firms must demonstrate their ability to remain within impact tolerances for all their important business services under severe but plausible scenarios, as per SS1/213. Firms must have made significant progress to strengthen their response and recovery capabilities to address cyber threats, address vulnerabilities exposed by legacy infrastructure and develop contingency procedures when material third party services are disrupted.

Additionally, the PRA expects firms to maintain robust oversight of their major outsourcing and third-party risks, including intra-group operational arrangements. See our article here for more on the proposals for firms to report operational incidents and material third-party arrangements.

The PRA also flags the evolving cyber threat landscape, and it encourages all firms to consider the PRA’s CBEST Thematic Reports and be mindful of thematic findings from the latest Cyber Stress Test that will be published in 2025.  In the second half of 2025, the PRA and FCA intend to consult jointly on policy relating to the management of Information and Communication Technology (“ICT”) and cyber risks.

Climate Change

While firms have made progress, the PRA recognises that many have yet to fully embed its climate-related expectations, particularly on scenario analysis and risk management. In 2025, the PRA will continue its engagement with firms most exposed to physical climate risks and consult on updates to SS3/19 (Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change) to support the sector’s progress in improving their management of climate-related financial risks.

With research assistance from Pjotr Bonde

Footnotes

  1. Insurance Bulletin, January 2023 – HFW
  2. Insurance Bulletin, January 2024 – HFW
  3. Insurance Bulletin, February 2022 – HFW

Main Bulletin
Insurance Bulletin January 2025