The return of life settlements stems ultimately from income exceeding expenses. The investment needs to be profitable, so it should be judged by its âcash-on-cash performanceâ. The net asset value (âNAVâ) performance, however, is different to the cash-on-cash performance, as various appreciations and depreciations of the portfolio are included in the NAV as well as the changing value of the cash account.
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.Â
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 âDear CROâ letter to heads of risk at UK life insurers.
The letter outlined the regulatorâs two main concerns from a sectoral review which it had carried out.
âOne 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 firmsâ preferred portfolio,â the PRA letter said.
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