A significant percentage of deal activity in the life ILS market consists of ‘value in force’ (VIF) transactions; the life ILS fund lends money to life insurance companies, with the collateral being the premium payments of a block of policies. One impact of the higher interest rate environment on both sides of the Atlantic is that deal activity in the VIF space is, currently, subdued when compared to previous years when lower interest rate regimes were more normal…
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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