Nassim Nicholas Taleb – author of The Black Swan – once said “The greatest risk is not the risk you can measure. It’s the one you never saw coming.” This summarises pricing litigation risk in the life settlement market quite well because that’s generally how a lot of people have priced litigation risk; they just crossed their fingers that it wouldn’t occur, or they added some percentage into the litigation risk premium, and hoped that accounted for the risk that they’ve tried to price for.
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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