The latest in a string of public consultations announced by the Bank of England’s Prudential Regulation Authority (PRA) was published on November 16, this time taking aim at the funded reinsurance market.
“The PRA considers that by setting out its expectations for life insurers’ use of funded reinsurance, the proposals will advance its primary objectives for safety and soundness and policyholder protection while allowing the life insurance sector to continue to play an important role in productive investment in the UK economy,” says the consultation.
“The PRA’s proposals reflect its assessment that there are significant potential risks to the PRA’s primary objectives arising from increased use of funded reinsurance arrangements in the UK insurance industry, including the potential for excessive concentrated exposures to correlated, credit-focused counterparties,” the consultation adds.
The PRA has previously issued a warning about the use of funded reinsurance by the UK’s life insurance industry.
In June, it published a letter that it sent to Chief Risk Officers of Life Insurance Firms regulated by the PRA, identifying four areas of potential risks: probability of recapture, correlated probability of recapture, loss given recapture, and management actions.
The PRA’s proposals include limiting life insurer’s exposure to funded reinsurance counterparties, implementing an ‘immediate recapture’ metric that would measure the impact on the firm’s solvency capital requirement (SCR) ratio of a scenario where all ceded business with a counterparty is recaptured, new expectations on firms around their collateral policy for illiquid assets in collateral pools, and more.
The consultation closes Friday, February 16, 2024.