I am not surprised that , ahead of publishing the numbers of the 11 insurers n the UK annuity market, the PRA has reassured us that none are currently in trouble or likely to be trouble from the risks we know about.
I do not profess to understand the report which you can read from this link or read about in the financial press.
I would not expect a part of the Bank of England to say anything else. If we were expecting some shock statement that it had found weakness then there would have been a major financial crisis in the air, we have not seen a major pension crisis for over three years (LDI) or in the banking system for over fifteen.
But nor have we seen such large transfers of pension liabilities than we have in the past three years to a small number of insurers. It has been an exit route that has been sanctioned by the BOE and the PRA and it has been called the gold plated option for employers with a DB pension hanging like an albatross around its neck.
I have not read the report from the PRA which Emma Simon of Corporate Adviser reports on. But from what I can see, there are two matters which are new
This life insurance stress test (LIST 2025) test looked at howthe eleven companies active in the bulk annuity market would fare in a global recession. This tested the impact investment portfolios of these insurers would be impacted bya decline in interest rates, falls in equity and property prices, along with the widening spreads and subsequent defaults and downgrades these market conditions might cause.
This is the third time the Prudential Regulator Authority has asked UK life insurers to participate in these tests, but it will be the first time it will publish results detailing how individual firms fared. These will be available next week.
It will be an interesting week – next week. There are other things happening!
There is a reduction in the “gold plate” as the investments made by the insurers yield higher amounts, require reduced capital and have more potential to go bust
Its results showed that in the core financial market scenario, designed to be ‘severe’ but plausible, firms experienced an aggregate £8.6bn reduction in capital surplus above regulatory requirements, with £12.9bn of assets downgraded to below sub-investment grade.
This strikes me as a fairly major change in security for those heading for the door (buy-in) or outside the pension scheme (buy-out).
Sam Matto-Willey, a consultant from Aon says that by publishing the financial strength of the annuity providers, the PRA is being more transparent about what ordinary people are getting. Isn’t this information in the hands of the decision markers ? Apparently it isn’t, which begs questions about how actuaries can sign off TAS300 – a statement of satisfaction that the transfer of members from pensions to insurance annuities is safe.
And Sam is not convinced that all the information needed is yet to be available , even to the PRA
“We note that the PRA has concluded that the life insurance sector is ‘resilient to the type of scenario tested’, but that risks associated with funded reinsurance remain a key focus, with the PRA considering whether further action is needed.”
Funded reinsurance (known on this blog as the slow boat to Bermuda) is now a feature of many insurers, either through being owned by American private market players or through partnerships with them.
Willis Towers Watson are also quoted by Emma, clearly they are looking forward to what is published next week and what’s to come on the slow boat to Bermuda.
But is this information really being shared as it should?
I will keep an eye out, on behalf of pensioners (like myself) who see an upside from being invested in a pension scheme, and a worry that my pension may be exchanged for an insurance policy with protection I don’t understand. I understand the PPF but not the FSCS and who protects me when I’m part of a buy-in is far from clear.
Please understand that I felt much of same way in the years of QE about the use of LDI. I was told I was being “gold-plated” by schemes borrowing to buy gilts.
While I am sitting on the sidelines and hence not looking at the actual reports, it does appear that one factor that does not seem to be considered is the insurers access to fresh capital. It has long been assumed that one source of funding to deal with a crisis is the capacity of the parent company to raise fresh capital e.g. through rights issues (as done by the banks during the Global Financial crisis). The impact of lack of access to such funds by mutuals was highlighted by Equitable Life.
Do insurance companies ultimately owned by private equity vehicles (particularly those in other jurisdictions) have the same potential access to further risk capital?
Also how does a potential risk to the parent company from a systemic problem originating in another environment translate to its UK operating subsidiary? (I am here thinking of the sub-prime mortgage market’s role in triggering the GFC).