S&P Global Ratings welcomes the Prudential Regulation Authority (PRA) new measures to control the spike in funded reinsurance (Funded Re) transactions and believes they will mitigate the associated risks, if implemented properly .
This follows a warning from the PRA stating that the UK life insurance sector could face a significant rise in balance sheet risks if these controls are not put in place, S&P has noted.
While acknowledging the potential benefits of funded re, the Prudential Regulation Authority (PRA) has consistently cautioned against associated risks.
Following its consultation process, the PRA published a final policy statement on Funded Re in late June, warning that restrictions may be placed on the amount and structure of Funded Re transactions.
Additionally, Funded Re could implement measures to address any underestimation of risk or regulatory arbitrage inherent in these transactions.
S&P Global Ratings welcomes the new controls and said that it will closely monitor how the sector navigates the PRA’s new policy, considering that several insurers have already put in place their own controls that broadly align with the new measures.
Ali Karakuyu, S&P Global Ratings analyst, said: “Some insurers have been making material use of Funded Re, specifically to manage some of the large pension scheme deals.”
Karakuyu also stated that, despite the warning over the use of Funded Re, the UK’s bulk purchase annuity (BPA) market will not be negatively affected.
“This is due to the pipeline of demand for pension risk transfer to insurers and the BPA sector’s good profitability. Furthermore, the recent U.K. solvency changes have resulted in a more favourable treatment of BPA business in terms of capital requirements, particularly in relation to matching adjustment eligible assets,” S&P explained.
“We therefore continue to forecast that the annual BPA premium will remain about £50 billion over 2024-2026,” added Karakuyu.
