In a letter to Chief Executive Officers (CEOs), the Bank of England (BoE) has said that it continues to “pay close attention to the role of funded reinsurance in the UK life market,” amid continued growth in the country’s life insurance sector and strong demand in the bulk purchase annuity (BPA) market.
The BoE has reiterated that it only sees a limited role for funded reinsurance as part of a diversified asset strategy.
Funded reinsurance is the transfer of investment risk and asset risk to a reinsurer and is used by UK insurers to help manage the pension risk they assume through BPA transactions. Demand for BPA deals has risen considerably, and as a result, insurers are increasingly looking to share some of the exposure with the funded reinsurance sector.
Last June, the BoE wrote to Chief Risk Officers to highlight some of the key risks about the use of funded reinsurance.
In November, following rapid growth in the UK BPA market, the BoE’s Prudential Regulation Authority (PRA) proposed stricter guidelines for life insurers utilising these arrangements.
Now, in a letter to CEOs outlining its insurance supervision priorities for the year ahead, the BoE has suggested that it will develop new measures and policies to mitigate its concerns over the heightened use of funded reinsurance by life insurers.
“We consider systematic use of funded reinsurance has the potential to introduce significant risks to our objectives of safety and soundness and policyholder protection,” reads the letter to CEOs.
“These are complex transactions which give rise to contingent exposure via recapture risk, and it is essential firms limit the scale and structure of such transactions to retain high confidence in their ability to safely recapture the transferred risks under stressed conditions,” continues the letter.
The letter goes on to state that through thematic work, the BoE has identified risk management weaknesses across life insurers transacting funded reinsurance.
“Given the potential firm-specific and systemic risks, the Prudential Regulation and Financial Policy Committees will keep funded reinsurance under review and we expect to develop further policy and supervisory measures in due course,” says the BoE.
