The UK’s Prudential Regulation Authority (PRA) will introduce stress testing for insurers’ exposure to funded reinsurance (funded re) transactions for the first time in 2025. The UK regulator first signaled its concerns over the use of this type of reinsurance treaty in June 2023 when it warned this structure could leave carriers exposed in stressed markets.
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.
Post a comment
Related Posts
Regulatory Progress Has Boosted Life Settlements, Yet Education Remains Key to Growth
Changes to the NCOIL life settlement model act in the past 25 years have been…
One Year On, UK Pension Risk Transfer Market Largely Unaffected by DB Code of Practice
A year after the UK Pensions Regulator’s code of practice on funding for defined benefit…
Is It Time to Rate Life ILS Structures?
The subject of whether life insurance-linked securities (life ILS) structures should be rated or not…
Are Bulk Purchase Annuity Buy-Ins Set to Feature More Often in the US Pension Risk Transfer Market?
Traditionally, PRT transactions in the US are of the buy-out variety, a trend driven by…
