Bank of England explores stricter supervision on life insurers’ offshore reinsurance

The Bank of England (BoE) is contemplating heightened oversight of life insurers’ engagement with the “funded reinsurance” market, amid growing reliance on the sector by corporate pension providers.

Funded reinsurers, often alternative asset managers known for riskier investments, play a key role in assisting insurers to manage corporate pension assets acquired through bulk annuity transactions.

In a recent communication to insurance chief executives, the BoE expressed concerns about the potential risks associated with the systematic use of funded reinsurance. These risks, according to the BoE, could impact the safety and soundness of financial institutions and the protection of policyholders.

As per a report from Reuters, the Bank also indicated its intention to continue monitoring the sector and develop additional policy and supervisory measures as needed.

The consideration for increased regulation comes at a time when higher interest rates in the UK have reduced the cost for corporate pension schemes to purchase insurance. This shift allows companies to transfer pension risks off their balance sheets more affordably.

The bulk annuity sector witnessed a record-breaking year, with transactions surpassing £50 billion ($63.51 billion) in the last year, as noted by James Mullins, a partner at consultancy firm Hymans Robertson.

The sector’s growth has seen participation from established major insurers and interest from private equity firms and smaller insurers seeking entry into the UK market, as reported by industry sources. The burgeoning demand for this insurance has led providers to share the risk associated with these deals with funded reinsurers, often located outside the UK.

The BoE’s concerns stem from uncertainties regarding insurers’ ability to manage complex deals under stressed conditions. This apprehension was echoed in November when the BoE advised insurers to limit their exposure to funded reinsurance.

Additionally, the International Association of Insurance Supervisors, last month, also acknowledged its investigation into insurers’ increasing involvement with the funded reinsurance market, indicating a growing international focus on the sector.

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