The UK pension-risk transfer (PRT) sector has become a buyer’s market. With a record 11 insurers vying for a slice of the estimated £1.2tn of assets in defined benefit (DB) pensions that have yet to be de-risked, and PRT pricing more competitively, trustees can be fussier about how they select a partner to help with their bulk purchase annuity buy-in or buy-out.
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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