The number of bulk purchase annuity buy-ins in the US pension risk transfer (PRT) market remains small in both absolute and relative terms despite recent signals of interest in these deals. The strict ERISA requirement for US plan sponsors to select the “safest available annuity provider” when transferring liabilities has also mitigated against other strategies because the standard is best met by the final, permanent nature of a full scheme 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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