UK life insurers tripling down on danger sharing with international reinsurers

In 2023, UK life insurers tripled the quantity of property transferred to international reinsurers, highlighting a rising reliance on risk-sharing practices scrutinized by the Financial institution of England (BoE) and pension trustees.

Giant insurers within the company pension scheme switch market usually cross on a portion of the pension property and liabilities they assume from firm steadiness sheets to abroad reinsurers.

In accordance with the Monetary Occasions, insurers executed at the least £6 billion in funded reinsurance offers in 2023, up from £1.9 billion in 2022. Main the transactions was FTSE 100 insurer Authorized & Common with £3.2 billion, adopted by Phoenix Group with £1.2 billion, and the privately owned Pension Insurance coverage Company with £1.3 billion.

Dangers of reinsurer transfers

The Financial institution of England has warned of serious dangers from the rise in funded reinsurance offers and is consulting on tighter rules. World regulators are more and more inspecting how property ceded to life reinsurers are invested, specializing in liquidity and different dangers.

Pension trustees have expressed considerations concerning the potential affect on savers’ advantages if these preparations, which lack public disclosure, fail. One trustee highlighted the shortage of transparency, noting that fund governors are handing over substantial property to life insurers with out absolutely understanding the related dangers.

The trustee additionally questioned the fiduciary accountability of transferring liabilities to 3rd events with out correct understanding or settlement.

The Financial institution of England’s Prudential Regulation Authority has not offered sector-wide information however plans to emphasize take a look at corporations’ funded reinsurance preparations subsequent yr. It has additionally proposed counterparty limits and different danger administration measures.

Lisa Leaman, a regulator, famous that the motivation for funded reinsurance offers is typically investing in property that may not be eligible underneath UK guidelines, probably creating dangers and capital pressure if an insurer must recapture its property and liabilities from a reinsurer.

Charlie Finch, a accomplice at consultancy LCP, famous that funded reinsurance had turn into fashionable amongst insurers to enhance the costs they provide on schemes. Nonetheless, he referred to as for higher and extra constant disclosure on the apply.

Insurers have notably defended the apply as a risk-sharing mechanism. Authorized & Common acknowledged that funded reinsurance was a “small proportion” of its £86 billion annuity e-book and that it labored with a fastidiously chosen panel of reinsurers.

Phoenix CEO Andy Briggs mentioned that the group had a “broad vary of [reinsurance] counterparties” that had been financially sturdy with “robust collateralization preparations in place.”

In the meantime, David Richardson, CEO of Simply, famous that the cash backing funded reinsurance offers goes right into a ringfenced collateral account with limits on how it may be invested.

Aviva declined to offer specifics on its utilization, describing it as a “small a part of our portfolio,” whereas Pension Insurance coverage Company declined to remark.

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