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It’s not unrealistic for institutional, end investors to expect – and receive – double digit IRRs from their allocations to third party life settlement fund managers; there are a range of stochastic probability curves that support this view. In addition, these investors are not only receiving additive gains to their broader portfolio, but they’re getting uncorrelated returns to traditional economic asset classes, something which is attractive in bull or bear 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.
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