Over 409,000,000 results returned from an early April 2022 Google search of these key words: “Low Interest” & “Environment” & “Alternative Assets”. If you refine the search and look only at the results from 2012-2014, the headlines look a bit different, yet the theme is the same. The bigger question is what unicorn investments are available to accrete when rates remain for some time at these current levels or begin to increase.
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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