With the buy-in market moving fast, trustees face a big question: how do you make sure your credit investments are working for you—not against you—when it’s time to transact? The decisions made today have a direct impact on future security for scheme members and the costs involved in transferring liabilities to insurers. With the market landscape shifting rapidly, getting your credit allocation right is more important than ever. For those who can remember such things, think of it like tuning a radio – you need to adjust to get the clearest signal as conditions change.
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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