The Bank of England’s Prudential Regulation Authority has published its funded reinsurance policy statement, and for life insurers in the UK looking to offload some of their bulk purchase annuity longevity risk to offshore reinsurers, the message is that the regulator expects them to understand fully the risks inherent to these transactions.
“It is essential that firms who have entered into FundedRe transactions are able to demonstrate, with a high degree of confidence, that they can withstand, in a viable form, either a single recapture event or multiple recapture events involving highly correlated reinsurance counterparties,” says Gareth Truran, Executive Director, Insurance Supervision, at the PRA in a letter to insurance company CEOs.
Life insurers are going to have a busy couple of months. In his letter, Truran also says that they have until the end of October to provide their PRA supervisor with information covering five categories: Self-assessment analysis, limits, remediation activities, level of confidence in the modelling, and risk appetite across their funded re activities.
There could well be a brief pause in the use of funded re as a reinsurance vehicle in the short term. Truran’s letter warns:
“If your firm makes use of FundedRe transactions, or is considering doing so, we expect your board to have considered your alignment with the [supervisory statement] as soon as practicable. In the interim firms and their boards should be particularly mindful of its expectations before entering into new FundedRe arrangements.”
