UK regulator the Prudential Regulation Authority (PRA) has revealed the design for its dynamic general insurance stress test (DyGIST), scheduled to take place in 2025.
The plan to run this stress test was announced in October last year, alongside the DyGIST three objectives.
One is the assessment of the UK general insurance sector’s solvency and liquidity resilience to a specific adverse scenario. The PRA also aims to assess the effectiveness of insurers’ risk management and management actions following an adverse scenario.
Additionally, the data gathered from the stress test will play a crucial role in shaping the PRA’s supervisory response in the event of a market-wide adverse scenario.
The PRA also indicated that it would provide more details on the design, timetable and participation of the stress test, which supports the three objectives of the exercise.
The DyGIST will comprise three phases, with the first one being the ‘live’ exercise. According to the PRA, during this exercise, firms will be presented with a sequential set of adverse events over a three-week period in May 2025 and will be asked to react to these as they would to real events.
Following each event, firms will be asked to provide initial financial impact assessments to engage with their supervisory contacts and follow their expected management action plans (in line with their risk management processes).
The second phase involves the final firm assessment and reflections. By the end of July 2025, participants will be asked to submit a final quantitative template with updated estimates of the impact of the events.
According to the PRA, the former acknowledges that during the ‘live’ exercise loss estimates may be based on scaling up exposures or applying other shortcuts to meet the demands of providing early estimates that would be required in a crisis.
The second face also includes firms submitting a qualitative questionnaire intended to draw out any risk management learnings.
The third phase will be analysis, publication and integration into supervisory plans. With the DyGIST being a core component of 2025 supervisory activity for the participant firms,the PRA intends to publish the findings of the exercise in the fourth quarter of 2025.
It also noted that dependent on conclusions, individual firm findings will also feed into supervisory plans for 2026.
The PRA expects to run a single scenario with multiple events for all participants. Results will be published on an aggregate industry level only.
In its announcement, the regulator also shared a list of the insurers – which covers around 80% of the PRA regulated general insurance market, including some of the largest branches, as measured by GWP – it intends to invite to participate in the exercise.
This list includes Admiral Group Plc, Allianz Insurance plc, AXA XL, Chubb European Group (branch), Flood Re Limited, Fidelis Underwriting Limited, Markel International Insurance Company Limited, and Zurich Insurance Company (ZIC) UK branch, among many others.
The PRA also noted that, between November 2023 and February 2024, it engaged with the industry through a series of workshops for the relevant trade bodies (the Association of British Insurers, the Lloyd’s Market Association and the International Underwriting Association), as well as the Society of Lloyd’s.
It highlighted that these workshops have influenced the high-level design and timing of the exercise and will continue to inform the PRA’s approach as it develops the events needed to meet the objectives of assessing solvency and liquidity with a view to testing risk management.
Looking ahead, in the second half of 2024 the PRA plans to hold further workshops with participating firms, vendors and brokers who may be supporting firms throughout the exercise and will continue to invite trade bodies to participate.
The purpose of these additional workshops will be to support and seek feedback on the logistics of producing and running a set of stylised adverse events – noting that the final scenarios will only be provided during the ‘live’ exercise.
