The BOE is ready to conduct a stress check on insurers to judge their publicity to reinsurers, reported the Monetary Instances, citing sources.
The transfer comes as issues develop concerning the dangers that offshore reinsurance preparations could pose to UK retirement savers.
The Prudential Regulation Authority (PRA) of the BOE, which oversees insurers, has beforehand highlighted “important potential dangers” related to the systematic use of funded reinsurance offers.
UK firms are transferring round £50bn ($62.7bn) yearly in pension liabilities to insurers, a pattern accelerated by rising rates of interest and improved pension scheme funding ranges.
To facilitate extra offers and liberate capital, insurers are more and more participating in transactions that cross on a portion of those liabilities, together with the corresponding property, to reinsurers.
These reinsurers are sometimes primarily based offshore in areas akin to Bermuda.
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As per the sources, the PRA’s stress check for the next 12 months will embody an “exploratory situation” to mannequin the impression on insurers of a possible failure of their funded reinsurance preparations.
This situation is more likely to simulate the collapse of a well-funded reinsurer, which might outcome within the major insurer reassuming the pension dangers with out the property that had been initially put aside.
In a typical funded reinsurance deal, insurers switch key dangers akin to asset or longevity threat to the reinsurer, together with sure property as collateral, following particular funding tips.
There’s a chance that authorities bonds could possibly be exchanged for different personal credit score property as reinsurers search increased yields.
World regulators have heightened their scrutiny of those agreements, particularly when collateral strikes offshore and escapes the purview of nationwide regulatory our bodies.
The PRA has additionally proposed setting limits on the variety of funded reinsurance offers insurers can undertake with particular person counterparties and has demanded notification of any important transactions on this space.
In a press release, the PRA mentioned it will “proceed to observe how market follow evolves in relation to funded reinsurance and can hold beneath overview whether or not additional measures are required”.
