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UK general & life insurers have “material dependency” on reinsurance: PRA

24th January 2023 - Author: Matt Sheehan

The UK’s Prudential Regulation Authority (PRA) has released the results of its 2022 insurance industry stress tests, which conclude that general and life insurers have a “material dependency” on reinsurance, which is likely to remain high despite increased pricing.

The tests, which looked at a total of 54 insurers, sought to measure sector resilience and provide thematic observations that support improvements in risk management.

Life insurers were asked to assess their solvency position following an adverse economic scenario and an increase in longevity, while general insurers and Lloyd’s syndicates were asked to assess their solvency position against a set of insured natural catastrophe and cyber losses.

The results indicate that the UK insurance sector is resilient to the PRA-specified scenarios, but highlighted the need for ongoing focus in a number of priority areas.

For general insurers, the primary mitigant for losses is considered to be reinsurance from both third-party and related party reinsurers, although the scale of this mitigation varies by firm based on gross losses as well as specific reinsurance and capital strategies.

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While the PRA concludes that external reinsurance is well diversified, it also highlights the importance of the availability, contractual performance, and structural suitability of reinsurance protection, and the need for firms to proactively manage reinsurance counterparty concentrations.

The results of the exercise suggest that the UK insurance sector is not financially reliant on any one reinsurer, and there no immediate concerns have been identified regarding the financial stability of the reinsurance arrangements in place.

However, with rating agencies generally having a stable to negative outlook on the reinsurance industry, the PRA asserted the need for firms to continually monitor the financial and strategic stability and suitability of their reinsurance counterparties.

Looking ahead, the PRA suggests that stress test participants may also look to retain higher levels of net loss relative to their gross losses if the hardening of prices in the global reinsurance and retrocession markets continues.

“This highlights the ongoing material financial reliance that UK firms have on the availability, contractual performance, and structural suitability of their reinsurance protections, along with the financial stability of their reinsurance counterparties, to mitigate their own risk of financial instability following material catastrophe losses,” the regulator concluded.

“This reinforces the need for firms to have robust and effective reinsurance management and governance procedures in place to manage counterparty concentrations and monitor the ongoing financial and strategic stability of their reinsurance counterparties.”

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