The FT are picking up on a speech by the Bank of England

You can read that speech here

Vicky White highlights new innovations in the UK life insurance sector, focusing on Funded Reinsurance and capital in the Bulk Purchase Annuities market. She outlines how the PRA aims to balance the risks that some forms of innovation might bring while facilitating ways in which alternative long-term capital options could safely support the market.

The Financial Policy Committee (FPC) highlighted that the growing usage of FundedRe could, if not properly managed, lead to a build-up of systemic risk in the sector. In a nutshell this is because complexity and lack of transparency in these arrangements mean they have the potential to increase the fragility of parts of the global insurance sector if the underlying vulnerabilities are not addressed

Yesterday I published a report that looked at the state of the reinsurance market in Bermuda. There has been quite a lot of pushback suggesting that the report and my blog are over-concerned but it seems that concern is shared by the Bank of England and PRA.

The FT are quite clear about what is in discussion

In these funded reinsurance deals, both insurance liabilities and the assets backing them are ceded to a reinsurer, often in a foreign jurisdiction such as Bermuda. The BoE is worried that this is a form of “regulatory arbitrage” that allows insurers to cut the capital they have while the risk remains the same. White said insurers have taken advantage of “a quirk in regulatory treatments” to reduce the capital they have to cover pension liabilities, adding that the BoE’s aim was “making sure that we act now to get the treatment right for the future”.

White also said the bank also worried these offshore deals were

“driving investment away from those UK productive assets which support the growth of the UK economy, and towards internationally based reinsurers”.

This looks a pretty toxic mix of weakened capital backing and reduced investment in a home economy.  But it is no new subject; Jo Cumbo and Ian Smith gave us this heads up over a year ag0

The picture hasn’t changed much in the FT

British insurers have used reinsurance so they can write more business with their limited capital. The Just book of business suggests that when looking behind the reinsurance contracts , the capital behind last year’s contracts was just over 1% , L&G have written business with 1% capital cover.  We are fronting things up for the reinsurers.

When it comes to American Private Capital companies – Blackstone (L&G), Apollo (PIC) and Brookfield (Just and Utmost), ownership or partnership has become the way forward.

The FT have for over a year spotted the “regulatory arbitrage” that could play against members if capital ran out.

…as regulators have issued multiple warnings on the risks of funded reinsurance, a lawyer said the groups are changing their strategy by coming into the market directly. The bulk annuities market is booming, with UK demand for such deals expected to reach £500bn over the next decade, according to consultancy LCP.

In her speech White said officials had found

“examples of large cash flow mismatches, as well as large unhedged currency exposures in current FundedRe transactions, far beyond what we would see in typical UK annuity firms’ direct investments”.

I am no expert in these matters, but this does not sound a good reason for trustees, employers and advisers to be signing off transfers to UK insurers who will ship member’s security to Bermuda. TAS 300 comes into play, actuaries should be well aware of the need to highlight such risks and warn about taking them if alternatives are available.

This is a highlight section of that document as it relates to…