The Bank of England told insurance groups on Thursday that relying on reinsurers to meet a surge in demand for corporate pension transactions risks creating “systemic vulnerabilities” in the sector and curbing domestic investment. warned.
Rising interest rates have sparked a so-called lump sum market in which companies offload pension liabilities and backing assets to insurers. The UK’s largest deal of its kind was announced in February, and analysts expect as much as £60 billion in benefits to be transferred to insurers this year, which would be a new record.
Some insurers use what is known as “funded reinsurance” to increase trading capacity. This involves handing over much of the pension commitment and the assets behind it to reinsurers, often in foreign jurisdictions such as Bermuda.
Charlotte Gerken, executive director of insurance supervision at the Bank of England’s Prudential Regulation Office, which oversees insurers, warned of the risks inherent in such a structure in a letter to executives on Thursday.
These include the risk that reinsurers will fail and pension providers will have to pay benefits but have no assets to back them up, or the risk that credit market shocks will make it difficult for insurers to respond. is included.
Gelken warned that the systematic use of funded reinsurance contracts to meet the demand for bulk annuity transactions poses “significant potential risks” to the sector.
“The effect may be to accelerate these transfers in the short term, but at the cost of creating systemic vulnerabilities in the form of concentrated exposure to correlated credit-intensive reinsurers. will be,” she wrote.
He said there was also an “opportunity cost” in using such deals, in that assets transferred to reinsurers would not be available for reinvestment in long-term investments in the UK, a key government objective.
Regulators have adequately reflected the collateral used in funded reinsurance transactions that may be difficult to trade in stressed markets, such as illiquid and private assets, and pension liabilities to be secured. specified no collateral.
Regulators said they were considering whether “further action” was needed to protect the health of the industry. Garken has asked insurance associations to promptly notify regulators of each future funded reinsurance transaction.
Large annuity providers such as Aviva and Just Group are using funded reinsurance to back their transactions. Just said in its 2022 annual report that the establishment “allowed us to optimize the use of capital towards our goal of increasing sales.”
Aviva and Just did not immediately comment.
