The secondary life insurance market in the UK has been essentially doomed to run-off since 2000 when British Chancellor of the Exchequer Gordon Brown abolished the mortgage interest relief at source (MIRAS) program. This decision, that built on the tax relief cut under the Conservative administration in 1993, effectively sounded the death-knell for the traded mortgage endowments market, given that no new issuance was occurring in any significant volume.
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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