In 2023, UK life insurers tripled the amount of assets transferred to global reinsurers, highlighting a growing reliance on risk-sharing practices scrutinized by the Bank of England (BoE) and pension trustees.
Large insurers in the corporate pension scheme transfer market typically pass on a portion of the pension assets and liabilities they assume from company balance sheets to overseas reinsurers.
According to the Financial Times, insurers executed at least £6 billion in funded reinsurance deals in 2023, up from £1.9 billion in 2022. Leading the transactions was FTSE 100 insurer Legal & General with £3.2 billion, followed by Phoenix Group with £1.2 billion, and the privately owned Pension Insurance Corporation with £1.3 billion.
The Bank of England has warned of significant risks from the increase in funded reinsurance deals and is consulting on tighter regulations. Global regulators are increasingly examining how assets ceded to life reinsurers are invested, focusing on liquidity and other risks.
Pension trustees have expressed concerns about the potential impact on savers’ benefits if these arrangements, which lack public disclosure, fail. One trustee highlighted the lack of transparency, noting that fund governors are handing over substantial assets to life insurers without fully understanding the associated risks.
The trustee also questioned the fiduciary responsibility of transferring liabilities to third parties without proper understanding or agreement.
The Bank of England’s Prudential Regulation Authority has not provided sector-wide data but plans to stress test firms’ funded reinsurance arrangements next year. It has also proposed counterparty limits and other risk management measures.
Lisa Leaman, a regulator, noted that the motivation for funded reinsurance deals is sometimes investing in assets that might not be eligible under UK rules, potentially creating risks and capital strain if an insurer needs to recapture its assets and liabilities from a reinsurer.
Charlie Finch, a partner at consultancy LCP, noted that funded reinsurance had become popular among insurers to improve the prices they offer on schemes. However, he called for better and more consistent disclosure on the practice.
Insurers have notably defended the practice as a risk-sharing mechanism. Legal & General stated that funded reinsurance was a “small proportion” of its £86 billion annuity book and that it worked with a carefully selected panel of reinsurers.
Phoenix CEO Andy Briggs said that the group had a “broad range of [reinsurance] counterparties” that were financially robust with “strong collateralization arrangements in place.”
Meanwhile, David Richardson, CEO of Just, noted that the money backing funded reinsurance deals goes into a ringfenced collateral account with limits on how it can be invested.
Aviva declined to provide specifics on its usage, describing it as a “small part of our portfolio,” while Pension Insurance Corporation declined to comment.
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