Right now, we aren’t just swapping pension assets for insurance policies, we’re sending much of the value of the insurance to Bermuda. London is no longer taking the risk and reward of insuring us against our living too long, that’s going on in a far-away haven about which we know nothing.
This ought to be looked at and I’m pleased to hear for the first time this morning the phrase “Bermuda on Thames”, not just because I live on the Thames and would like to live in Bermuda right now. I mainly want the money we send to the Caribbean by way of reinsurance premia, to stay in London, ensuring London remains pre-eminent in insurance.
Combined with a special tax regime, Reinsurance UK would be a knockout success for London, given the insurance infrastructure in London already. That truly would lead to a huge net benefit for UK tax revenues, new jobs in the London market and create an inflow of assets to be managed and invested in and from the UK. It is certainly worthy of serious consideration.
So why send our risk out to Bermuda to be reinsured?
The simple answer is “regulation”. The Bermuda insurance system is regulated with reference to principles , not the hard-coded rules of Solvency II which still operate in the UK (even though they emanate from Europe.
The insurance companies that cry “foul” at pension funds wanting to consolidate each other using TPR’s solvency codes, are more than happy to take advantage of the insurance equivalent in Bermuda.
As Chaplin points out, Solvency II isn’t right for reinsurance and UK insurers outsource its reinsurance risk to the Caribbean which does reinsurance better
Reinsurance is a sophisticated product only available to other insurers. It involves an insurer economically laying off risk to a reinsurer. Indeed, in some regulatory regimes around the world, reinsurance is subject to limited regulation — recognising that reinsurance is a risk mitigation technique for professional counterparties, based heavily on credit rating or contractually-governed collateral — so the system largely self-polices.
Of course, reinsurance can be – and is – a part of the risk management of UK pension schemes. Many large schemes have now – for a hefty premium, insured that should pensioners above a certain age live and continue to pick up pension payments , that is someone else’s problem – someone in Bermuda.
Insurance is necessarily part of the pension infrastructure with insurance policies inside most DB plans in one way or another. But that insurance is not benefiting Britain as it should be and it’s certainly not benefiting the Thames, which as I write is looking cold and hostile!
We want to see a homegrown insurance industry where we take the value from insuring our people. Shipping the risk off to the Caribbean makes financial sense right now for insurers, pension schemes and their sponsors, but it’s not doing much to make Britain productive.
If we seriously want to put our pensions to work for the regeneration of the British economy, reinsurance should be underwritten on the Thames and not in Bermuda.
… and we have let, indeed has been set as an aspiration by the Regulator for, this system for the transfer of the funding of our old age pensions to happen under our noses, unchallenged.
“…based heavily on credit rating or contractually-governed collateral — so the system largely self-polices.” Wonderful – does Lehman and tail-risks come to mind…?
TPR – of insurers, for insurers.
The idea “That truly would lead to a huge net benefit for UK tax revenues” shows the flaw in this idea. I have been travelling to Bermuda since the mid-1960s, before their exempt companies legislation was even thought of. It should be understood that the taxation of captive insurers was an important element in the growth of their establishment. There of course was some abuse, but that was resolved following the Carnation /US IRS case of the mid/late 1970s. Thousands of captives were formed in the 1970s and 1980s – a number of industry mutuals also chose to base themselves there. It was not really until about 1990 that reinsurance (of external risks) began to develop as an insurance line there. The writing of extremely long tail pension type reinsurance came even later. The reluctance can easily be explained – it was concern that the existing tax treatment would cease and become much more onerous in the middle of the term of these policies. This is not so much of a problem for the risks insured by captives.
The captives had of course long been buyers of reinsurance in the US and London markets.
Would you really trust HMRC over the timescales of pension reinsurance?