UK regulator the Prudential Regulation Authority has announced a new consultation paper, CP8/26 – Funded reinsurance – that spells out its plans for new regulations that will treat funded reinsurance more like other investments that UK life insurers hold from a regulatory capital perspective.
The PRA says that for the average funded reinsurance, firms currently hold capital worth 2-4% of the value of the annuity liabilities, compared to 11-15% for similar investments. Under the proposals announced today, the PRA estimates that the capital held for the average funded reinsurance transaction would shift to around 10%, which it says materially addresses the inconsistency but recognises that there are some differences.
“Funded reinsurance is growing rapidly and has the potential to undermine the resilience of insurers if not managed properly. Today’s proposals aim to iron out the discrepancy in the regulatory treatment for these deals, to protect pensioners and improve insurers’ incentives to invest directly in the UK economy,” said Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA.
The PRA estimates that current funded reinsurance exposure of UK firms is around £40bn, but says that this number is rising quickly, reflecting both BPA market growth and how the current treatment “unduly favours funded reinsurance over other similar risks”. Today’s proposals would more closely align the treatment of counterparty default risk within funded reinsurance with the treatment UK insurers apply to similar investments.
Today’s proposals would not apply to business already executed or completing shortly but would apply to any business from 1st October onwards.
