The Covid-19 pandemic has caused a dramatic shock to health and life expectancy, disrupting the pattern of mortality improvement seen historically in the UK population. Since March 2020, we have witnessed over 160,000 excess deaths compared to what would have been expected if mortality rates had remained at pre-pandemic levels. Early on, the vast majority of excess deaths were a direct consequence of Covid infections.
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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