Financial institution of England warns towards reliance on reinsurers for company pension offers


The Financial institution of England on Thursday warned insurance coverage teams that counting on reinsurers to assist meet a surge in demand for company pension offers risked making a “systemic vulnerability” for the sector and restraining home funding.

Rising rates of interest have lit a fireplace below the so-called bulk annuity market, the place firms offload their pension liabilities, and the belongings backing them, to insurers. The UK’s largest transaction of this type was introduced in February and analysts anticipate as a lot as £60bn of advantages will likely be transferred to insurers this yr, which might mark a brand new document.

Some insurers are making use of what’s referred to as “funded reinsurance” to extend their capability to do offers. This includes passing on a bit of pension guarantees, and the belongings behind them, to reinsurers, typically in international jurisdictions comparable to Bermuda.

In a letter to executives on Thursday, Charlotte Gerken, government director of insurance coverage supervision on the BoE’s Prudential Regulation Authority, which supervises insurers, warned of the dangers embedded in these buildings.

These included the danger that reinsurers may fail, leaving pension suppliers to pay the advantages however with out the belongings to again them — and {that a} shock within the credit score markets may make it tough for insurers to reply.

Gerken warned that the systematic use of funded reinsurance preparations to satisfy the demand for bulk annuity offers posed “vital potential dangers” to the sector.

“The impact may be to speed up these transfers within the brief run, however it might come at a price of making a systemic vulnerability within the type of a concentrated publicity to correlated, credit-focused reinsurers,” she wrote.

The usage of such transactions additionally had an “alternative price”, she stated, in that belongings ceded to reinsurers aren’t out there for reinvestment in long-term UK investments, which is a key aim for the federal government.

The regulator had recognized collateral being utilized in funded reinsurance offers, comparable to illiquid and privately held belongings, that may be tough to commerce in a confused market, in addition to those who didn’t sufficiently mirror the pension liabilities they have been supposed to again.

The regulator stated it was contemplating whether or not “additional steps” have been wanted to guard the soundness of the sector. Gerken requested that insurance coverage teams notify the regulator promptly of particular person funded reinsurance transactions entered into from this level on.

Bulk annuity suppliers together with Aviva and Simply Group have made use of funded reinsurance to help their offers. In its 2022 annual report, Simply stated the set-up “enabled us to optimise our use of capital with our ambition to develop gross sales”.

Aviva and Simply didn’t instantly remark.

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