PRA speech: moderation in the Bulk Purchase Annuity market

Charlotte Gerken, PRA Executive Director – Insurance, has delivered a speech on trends in the Bulk Purchase Annuity (BPA) market at the 20th Annual Conference on Bulk Annuities. The speech noted that pension scheme funding had greatly benefited from rising interest rates, and that the UK insurance industry is preparing itself for record levels of BPA transfers. While acknowledging potential business opportunities, Gerken warned of the temptation for insurers to “over-indulge” in new business, and highlighted three key trends that PRA has noted in the industry:

Expansion of BPA insurer risk appetites

Gerken highlighted how increased affordability of buy-outs and decreased appetite in trustees of pension schemes to retain risk has resulted in a growing desire for schemes to transact in one go. As deals become larger and increasingly focussed on buy-outs of complete schemes, PRA has observed BPA writers expanding their risk appetite, in some cases beyond their current expertise. For example, there is increased appetite to insure deferred pensions scheme members. These younger individuals bring an increased longevity risk as well as risks stemming from cash commutation, flexibility on retirement age and transfers out.

Increased reliance on third party capacity

On the topic of funded reinsurance, the speech noted that attracting new capital to support BPA liabilities is positive in principle, but the capital must be aligned with the long-term risks it is intended to support. Gerken had previously spoken on counterparty risk emerging from this trend, and in this speech gave a brief update on PRA’s work so far on understanding and addressing the issue.

Overall, Gerken concluded that the long-term implications of these arrangements would have to be considered carefully. She noted that within the objectives of the Solvency II reforms, it is not clear that the incentives of third party capital providers are aligned with UK insurers’ role in making investments in the UK based on long-term infrastructure and productive assets.

Greater interconnectivity with the wider financial system

Gerken discussed the considerable structural changes  likely to occur in the control of long-term investments should the UK life insurance industry onboard the vast pension liabilities that sector estimates predict. She warned that the decisions that insurers make now will come to have consequences in the long term for the performance of the wider economy.

The speech also discussed insurers’ investment strategies in the context of ESG movements, noting that such investments can generate material benefits to society and insurers, provided they maintain discipline in their leverage, namely the extent to which they deploy debt capital and use reinsurance to support their promises to policyholders.

Laura Wiles