Life insurers pass stress tests amid fears of shadow banking bubble

Britain’s largest life insurers have passed a key stress test from the Bank of England amid fears a shadow banking bubble could leave them vulnerable to a market crash.The 11 insurers, including Aviva and Legal & General, were given a clean bill of health by the watchdog after being tested with an imagined market meltdown that wiped out almost £9bn of their capital.According to the Bank of England, even if billions of bonds were downgraded to junk and the stock market crashed, they would still hold 154pc of the regulated amount of capital required in a crisis – down from 185pc before the hypothetical crunch.“All firms continue to meet their regulatory capital requirements, underscoring the sector’s robust starting position and ability to absorb significant shocks of the kind tested in the exercise,” the Bank said.The pass mark for the insurers, who between them fund 90pc of UK annuities, comes amid fears that landmines could be lurking inside financial markets, much as pension funds discovered during the Liz Truss meltdown of 2022.This year, fears have focused on the $3tn (£2.3tn) “shadow banking industry”, where private-equity firms and fund managers lend to companies instead of the banks.Several high-profile corporate collapses in America have sparked concern that the lenders, chasing higher returns amid increasing competition, are taking greater and often under-appreciated risks.American private-equity firms have sought to take over several British life insurers this year.This has sparked concern that they might bring less crisis-proof investment and reinsurance practices into the UK market – potentially leaving Britons’ retirement incomes more at risk.In July, US group Athora announced a £5.2bn takeover of Pension Insurance Corp (PIC), while Canadian fund manager Brookfield said it would pay £2.4bn for Just Retirement.Both insurers passed the Bank of England’s stress tests, which were based on their financial position at the end of 2024.In the stress test scenario, PIC would end up with eligible capital worth 184pc of its solvency capital requirement after the stress test, down from 236pc before – a £1bn reduction in its capital surplus.Just Retirement’s ratio would drop from 178pc to 156pc, a £180m reduction in its capital surplus.Other insurers involved in the stress tests included Canada Life, Partnership Life Assurance, Phoenix Life, Rothesay Life, Lloyds Bank’s Scottish Widows division and M&G Prudential Assurance.‘The sector remains resilient’M&G issued a note to the London Stock Exchange on Monday saying that the stress test had highlighted Prudential Assurance’s “financial resilience, even under severe financial stress”.The Bank of England said it had also modelled the particular risks around the bulk purchase annuity market, in which defined-benefit pension funds offload their schemes to a life insurer.This extra testing had suggested that “the sector remains resilient to the additional stress specified”, the review said.The Bank’s stress test is limited to the capital held within a given insurance firm, rather than the wider financial services company that, in many cases, the insurer sits within.The Bank and several of the companies noted that there might be extra capital available from the wider group, which could help mitigate any issues arising on the insurance unit’s balance sheet. But this was excluded from the test to help aid comparison between the firms.