The UK Prudential Regulation Authority (PRA) is finalising its consultation on the use of funded reinsurance (Funded Re) in defined pension risk transfer (PRT) deals. The review began in November 2023 and will conclude on February 16, 2024.
In a recent commentary from analysts at J.P. Morgan, they discuss what this will mean for the UK PRT industry.
The PRA’s consultation paper, CP24/23, outlines expectations for the structure, use, and modelling of Funded Re arrangements under the Solvency UK framework. Key proposals include setting limits on investment allocation by third-party reinsurers, modelling the risk of capital requirements from recaptured liabilities, and considering the probability of default and recapture risk in capital requirement calculations.
Additionally, the PRA emphasises the importance of limiting dependence on any single Funded Re counterparty and scrutinising the types of investments, including illiquid ones, used in collateral.
Despite the detailed proposals, analysts at J.P. Morgan expects the immediate impact on the UK life PRT industry to be minimal.
They estimate that “Funded Re accounts for <5% of existing gross PRT liabilities. It has been growing in use, and we believe accounts for ~10% of new transactions written in 2023.”
While the use of Funded Re has been steadily growing, it has not yet represented a significant portion of the capital mix for these deals.
J.P. Morgan emphasises that UK insurers using Funded Re transactions already employ a diversified panel of reinsurers, indicating proactive risk management practices.
They also highlight the robust demand from third-party capital to enter the PRT market, driven by the high returns available.
Looking ahead, J.P. Morgan suggests that any attempt to restrict the inflow of capital into the PRT industry will likely support pricing and lower new business strain.
With the PRT industry expected to see about £600 billion in deals over the next decade, regulatory measures that enhance stability while maintaining attractiveness to investors are crucial.
The PRA’s consultation on Funded Re in PRT deals is a significant step in ensuring the strength of the UK PRT industry.
While the immediate effects might not be significant, the long-term implications of these proposals could shape the trajectory of the industry, influencing pricing dynamics and investor sentiment.
As stakeholders await the outcome of the consultation, attention remains focused on balancing regulatory requirements with the need to maintain a competitive and vibrant PRT market in the UK.
