UK regulator the Prudential Regulation Authority (PRA) has reported that part of its new business plan for 2023/24 will involve assessing high levels of reinsurance use and of concentration risk in certain areas.
This will include paying close attention to the impact of the level of reinsurance of longevity risk in new annuity business, the PRA said, as well as the emergence of the more complex ‘funded reinsurance’ in the UK life market.
In particular, the potential offshored counterparty concentration risk arising from rapidly growing levels of reinsurance could impact individual firms and the sector, the Authority explains.
The PRA’s review of risks will consider compliance of reinsurance strategies with the Prudent Person Principle (PPP), including the impact of and resilience to recapture risk where large concentrations to a small number of counterparties or to correlated counterparties exist.
The PRA will also assess the need for further policy proposals or guidance on use of and risk management of these reinsurance structures and limits.
More broadly, the latest business plan will see the PRA will continue to be focussed on maintaining financial and operational resilience, consistent with its objectives and those of the FPC.
As part of its resilience aims around Solvency II the PRA plans to issue a series of consultations on rule changes and expectations that will implement the reforms outlined in HMT’s consultation, which the UK Government announced its intention to implement back in November 2022.
And, following publication of the results of its 2022 Insurance Stress Test, the PRA also plans to work on the design of the longer-term strategy for insurance stress testing, and will announce a timeline for the next insurance stress test during the second half of this year.
One of the supervisory measures announced by the Government in November 2022 was to require firms to participate in regular stress testing exercises prescribed by the PRA and to allow the PRA to publish individual firm results.
