The Bank of England would like to see more longevity risk being retained and less being transferred offshore through reinsurance arrangements, leading it to explore amending Solvency II risk charges to encourage greater retention.
The Bank of England’s Prudential Regulation Authority (PRA) has before discussed its concerns over the use of offshore longevity reinsurance, as it sees pension annuity linked longevity risks disappearing abroad, while the local insurers retain very little of it themselves.
The regulator has previously questioned UK pension insurers and providers over their use of offshore reinsurance to transfer pension risks, saying that while the regulator understands the need for risk transfer its concerns lie in pension liabilities being transferred overseas.
The Bank has said before that it is offshore reinsurance domiciles that are often the recipients of UK pensioners assets and so it has concerns that this takes the pension assets outside of its regulation, meaning should an offshore reinsurance firm fail the obligations to UK pensioners may not still be met.
In a speech this week, David Rule, Executive Director of Insurance Supervision said that the Bank of England is now considering making changes to risk charges related to longevity exposures, to encourage more of the risk to be retained and less to be reinsured.
In his speech, Rule explained that in bulk annuities, “Most of the longevity risk on new transactions is currently being reinsured,” with one of the drivers of this being a way for insurers to mitigate the impact of Solvency II risk charges for holding longevity exposures on their books.
“We recognise that the risk margin on long-dated insurance risks such as longevity is too sensitive to the level of interest rates and therefore too high currently,” Rule explained, adding that “We are actively looking at further steps available to us within the constraints of Solvency II to address this issue.”
Rule said that a reduced or more appropriate Solvency II risk margin, “Would lead to a better balance between longevity risk being retained and reinsured by UK insurers on new business.”
But he warned that while significant levels of longevity reinsurance continue to occur, “Insurers should be paying close attention to counterparty and operational risks.”
The key concern is of reinsurance company failures impacting UK pensioners here, while the UK insurers have outsourced a portion of the assets associated with their pension pots to reinsurers in return for offloading the longevity exposures that impact their capital arrangements so much.
Changing Solvency II risk margins is not something the regulator takes lightly, reflecting the level of concern at the Bank of England over this issue.
Global reinsurers, which have been soaking up huge amounts of longevity risk in massive deals with bulk annuity insurance specialists, or direct with pensions, could find the flow of longevity risk out of the UK slows in future, cutting off some of what has been a key tool in helping certain life specialists grow in recent years.
