The subject of whether life insurance-linked securities (life ILS) structures should be rated or not is a conversation almost as old as the market itself. To date, the cons have largely outweighed the pros. The confidentiality of data and assumptions, the costs and complexity of getting trades rated, the perceived risk of commoditisation and loss of control, and the investor base being comfortable with these structures without ratings have all contributed to something of an ‘if it isn’t broke, don’t fix it’ mentality in the market.
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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