London, United Kingdom. The Bank of England’s Prudential Regulation Authority on Wednesday set out plans to tighten the capital treatment of funded reinsurance used by life insurers to transfer risk to offshore reinsurers. The PRA said insurers would need to hold more capital against these transactions to reflect higher risk.
Proposed capital increase and rationale
The PRA said British life insurers would have to increase the amount of capital they hold against funded reinsurance transactions to about 10%, up from about 2% to 4% currently. The regulator said it had concluded the current approach underestimates the risks and unduly favours funded reinsurance structures over other similar exposures.
Gareth Truran, an executive director at the Bank of England, said: “We want to act now to correct this imbalance before it grows to pose more material risks across the sector.”
Growing exposure and market participants
Funded reinsurance has been growing rapidly, with the PRA estimating current exposure of UK firms at around 40 billion pounds ($54 billion). The regulator expects exposure to grow to 100 billion pounds over the next decade.
Offshore reinsurers involved in these deals are increasingly backed by private equity. Firms including Apollo, KKR, CVC and Carlyle are among those that have expanded into the sector.
Large UK life insurers include Aviva, Legal & General and Standard Life.
Broader regulatory focus in the UK and abroad
The PRA said the move is the latest step by the Bank of England to address risks arising from the growing links between private investors and the banks and insurers it regulates. The regulator has previously described the regulatory treatment of funded reinsurance as a “quirk” and said the deals appear to be driving investment away from assets that support the UK economy and instead towards internationally based reinsurers.
The UK is not the only jurisdiction examining growing ties between private investors and insurance, with regulators in Europe and the United States also scrutinising reinsurance.
How could higher capital requirements affect the way UK life insurers use funded reinsurance?
