PRA consults on funded reinsurance

The PRA is consulting on changing regulatory treatment of funded reinsurance to treat it more like other investments. Life insurers pay large up-front premiums to reinsurers in return for future payments, which generally account for capital worth between 2-4% of the value of their annuity liabilities, compared to up to 15% for similar investments. The PRA says that the plans would mean around 10% would be held for the average funded reinsurance transaction.

Latterly, the sale of BPAs to DB pension schemes (which oblige the insurer to pay regular pensions as long as needed) have led many of the relevant insurers to use funded reinsurance – but because this is paid to offshore reinsurers, what those entities invest in do not need to comply with UK standards.

The PRA has noted that funded reinsurance use is increasing, and this could in future have a large impact on life insurers’ solvency positions.

So it is proposing to more closely align the treatment of counterparty default risk within funded reinsurance with the treatment that insurers apply to similar investments, and believes this shold reduce incentives for firms to choose funded reinsurance over other capital sources, which in turn it hopes may drive further investment in the UK economy.

The PRA plans that the changes would apply to any business from 1 October onwards.

Consultation closes on 31 July.