The Prudential Regulation Authority (PRA) is updating the upcoming Life Insurance Stress Test as it continues to focus on the use of funded reinsurance by life insurers in the bulk purchase annuity (BPA) space in the UK.
The BPA market is expected to exceed 300 transactions for the first time this year, with the combined annual value of buy-ins and buyouts exceeding £60bn (€70.3bn) by 2027, according to LCP predictions for the pension risk transfer market in 2025.
Gareth Truran, executive director of insurance supervision at PRA, said the regulator’s job is to make sure that insurers taking on these liabilities remain safe and sound, with policyholders protected, and that the sector can continue to fulfil its critical economic functions of providing retirement income to policyholders and long-term investment throughout the cycle.
As part of that, he said, it is important that the sector can safely absorb the high projected volumes of new BPA business.
Truran noted, therefore, that the growth in use of funded reinsurance remains high on the regulator’s supervisory and policy agenda.
Since publishing policy expectations to UK insurers active in funded reinsurance last July, the regulator said it saw some “positive signs of change, including some insurers adopting more robust or formalised collateral policies and recapture plans”.
However, Truran said that there are also areas where some firms are falling short.
He explained: “In particular, the limits that insurers have set to manage their funded reinsurance exposures do not always align with our expectations. It is also not clear that the frameworks firms have in place for managing their funded reinsurance adequately mitigate the potential for a build-up of systemic risk in aggregate.
“While our expectations were designed to set important baselines for prudent risk management practices, they have not so far appeared to materially alter the outlook for funded reinsurance volumes, nor do they appear to have prevented a trend towards weaker collateral standards.”
Truran said work will remain a supervisory priority for the PRA in 2025, as the regulator continues to consider whether further action is needed to address the risks in light of its findings.
Life Insurance Stress Test
Truran has also updated on the upcoming Life Insurance Stress Test (LIST), where, for the first time, the regulator plans to increase transparency by publishing both sector-wide and firm-specific stress test results for the largest UK life insurers.
“The limits that insurers have set to manage their funded reinsurance exposures do not always align with our expectations”
Gareth Truran, executive director of insurance supervision at PRA
He said the objective of the stress tests is to assess sector-wide and individual firm resilience to severe but plausible events; to strengthen market understanding and discipline through individual firm publication and to improve insights into risk management vulnerabilities.
The exercise has three parts: a core financial market stress, and two additional ‘exploratory’ scenarios – an asset concentration stress, and a funded reinsurance recapture scenario.
“LIST 2025 will focus on the largest BPA writers as an important part of the life sector. In designing the firm-specific disclosures, we have consulted potential users, including analysts, credit rating agencies, pension fund trustees and advisers to understand the information they would find helpful to understand insurer resilience,” Truran continued.
He said: “I want to emphasise that LIST is not a pass or fail exercise and the results will not be used by the PRA to set regulatory capital.”
Truran said the LIST 2025 results will be published towards the end of the year, with the publication split into two stages.
The first publication is expected to include aggregate results, with sector-level commentary and aggregate disclosures covering all three parts of the exercise.
The second publication will include firm-specific disclosures, showing the high-level composition of firms’ matching adjustment portfolios by asset class, and the impact of the core financial market stress scenario on their solvency positions in each stage of the stress.
No surprise
According to Charlie Finch, partner at LCP, it is “no surprise” that the PRA has a big focus on the bulk annuity market, with nearly £50bn of UK pension assets being passed to insurers each year.
“The PRA had particularly strong words on the use of funded reinsurance by insurers, highlighting a trend towards weaker collateral standards despite the guidance the PRA issued last year. The PRA again flagged that they may take more direct action to address the risks they see in this area,” he said.
Finch also welcomed the new insurer stress test, adding: “These will provide a new level of insight into the robustness of insurer balance sheets. In particular, it will shed light on the extent of the exposure the industry has to funded reinsurance and therefore the degree of scrutiny pension schemes should be giving it when entering into buy-ins.”
Nick Ford, head of UK insurance and financial services at Hymans Robertson, said it is “helpful” of Truran to provide the update on the Life Insurance Stress Test and confirm that firms will be able to provide more details alongside the individual results.
“This will be key in order for insurers to enable stakeholders to gain a deeper understanding of the impact of the very severe stresses that are included with the exercise and the levers that they have at their disposal – for example, related to the support that they get from being part of a group,” he said.
Ford noted that the publication of the results will provide details on individual insurers’ asset strategies and matching adjustment benefits, which “will need to be treated with care when comparing across insurers given the very different business models and strategies being adopted”.
Read the digital edition of IPE’s latest magazine
No comments yet