More than 200 years ago, Equitable Life, the now defunct UK mutual life insurer, realised that they were making excess profits and started distributing them to policyholders via reductions in the following years’ premium. This profit distribution evolved into making annual increases to the sums insured; the next evolutionary iteration was to deliberately load premiums to allow for scope to intentionally generate “profits” by diverting the additional margin into riskier…

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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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