Insurers warned over use of funded reinsurance with latest PRA statement – KPMG

The Prudential Regulation Authority (PRA) has issued its latest policy statement on funded reinsurance, emphasizing a significant shift in the regulation of such transactions.

James Isden (pictured above), insurance partner at KPMG UK, addressed the implications for life insurers.

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“The PRA has reiterated today that it is drawing a line in the sand regarding the use of funded reinsurance,” Isden said. “The expectation appears to be that life insurers will, with immediate effect, fundamentally revisit the volume, complexity and risk management of their funded reinsurance transactions.”

“Firms have until the end of October to submit a convincing plan to their supervisors. It’s now up to insurers to decide how to balance the use of funded reinsurance, alongside enhanced oversight considerations for these arrangements, with the threat of further intervention if the PRA is not satisfied with the outcome,” he said.

Read More: Is the heightened scrutiny around funded reinsurance justified?

The PRA's recent policy statement (PS) responds to feedback from the consultation paper (CP) 24/23 on funded reinsurance. The final policy is outlined in the supervisory statement (SS) 5/24, included in Appendix 1 of the PS.

The PRA has acknowledged the feedback from CP24/23 and has made several significant adjustments to the draft policy. Key changes include:

• A clarifying statement allowing firms to consider diversification between funded reinsurance counterparties and associated risks.
• Guidelines on setting internal investment limits, specifically regarding the limit for recapture from a single counterparty.
• Adjustments to collateral policies to clarify the nature of collateral assets and documentation requirements.
• Enhanced expectations for Board involvement in recapture plans.
• Clarifications on managing uncertainty in internal model outputs for funded reinsurance.
• Guidelines on the PRA's perspective on collateral mismatch risk time horizons.
• Amendments on the use of collateral haircuts.

The PRA's adjustments reflect its commitment to ensuring that funded reinsurance transactions are managed with greater scrutiny and transparency.

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