Interest in the life settlement asset class, the purchase of an unwanted and unneeded life insurance policy for a lump sum payment, has continued to grow steadily over the course of the last two decades because of potential double digit returns uncorrelated to the capital markets. The foundation for investors’ confidence in the asset class is that the policies purchased are legally originated and will not be subject to challenge by the policies’ former owners…
Insurers are favouring funded re as it helps firms manage the market and longevity risks associated with writing bulk purchase annuity (BPA) business by reducing capital charges and therefore making PRT deals more competitive.
Unsurprisingly, given its growth and potential for capital optimisation, UK regulators have been carefully watching the increased use of funded re. In June 2023, the Prudential Regulatory Authority (PRA) sent a “Dear CRO’ letter to heads of risk at UK life insurers.
The letter outlined the regulator’s two main concerns from a sectoral review which it had carried out.
“One of the key risks arising in funded re is that firms recapture sub-optimal portfolios with depressed values and with limited ability to be transformed effectively to the firms’ preferred portfolio,” the PRA letter said.
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