Growth in the purchase of bulk purchase annuity (BPA) contracts by small defined benefit (DB) pension schemes over the past couple of years has been accompanied by the emergence of templated transfer processes that speed the closure of deals, enabling insurers to execute more of them. In offerings that have been likened to ‘off-the-shelf’ products, a handful of insurers have created standardised pricing models and procedures that streamline the risk offset process for schemes with assets of £150m or less.
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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