There has been extensive coverage in the trade media in the past 12 months relating to the use of private assets by US life insurers to back pension liabilities they onboarded through bulk purchase annuity transactions; the coverage has largely been driven by lawsuits being filed against certain plan sponsors where the plaintiffs suggested that the plan sponsor did not use the ‘safest available annuity provider’, a requirement, as laid out in the Department of Labor (DOL) Interpretive Bulletin 95-1 of the Employee Retirement Income Security Act of 1974 (ERISA).
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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