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Large British life insurers have tripled their controversial reinsurance deals.

Large British life insurers have tripled their controversial reinsurance deals.

 


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Britain's largest life insurers tripled the amount of assets they place with global reinsurers last year, underscoring their growing reliance on risk-sharing practices that have come under scrutiny by the Bank of England and pension trustees.

Most large insurers, which have a booming market for corporate pension scheme transfers, typically pass on a portion of the pension assets and liabilities they acquire from the company's balance sheet to overseas reinsurers.

Insurers conducted at least 6 billion funded reinsurance transactions in 2022, up from at least 1.9 billion, according to information provided by insurers to the Financial Times and company reports. FTSE 100 insurer Legal & General led the way with 3.2 billion. , the listed Peer Phoenix Group recorded 1.2 billion and the privately owned pension insurance company recorded 1.3 billion.

The Bank of England has warned that a surge in funded reinsurance transactions poses serious risks to the sector and is debating stricter regulations. Regulators around the world are increasingly scrutinizing how assets transferred to life reinsurers are invested, the level of liquidity and other risks taken.

The pension trustee also warned of the impact on savers' benefits if these measures, which limit disclosure, fail.

A pension trustee said the lack of transparency around funded reinsurance meant fund governors were handing over billions of pounds of scheme assets to life insurers who did not understand the financial structure but were known to be ironclad.

In the world of trusteeship, it's acceptable to give money to others – to entities that don't understand the risks – and that entities can transfer liability to third parties without your consent, the trustee said.

The BoE's prudential regulator is planning stress tests for companies that fund reinsurance contracts next year, although it declined to provide sector-specific data. It also proposed counterparty limits and other risk management steps.

Regulator Lisa Leaman said in a speech last month that the motivation for funded reinsurance deals is sometimes to invest in assets that may not match the insurer's liabilities under UK rules. This could pose potential risks and capital burdens if insurers need to recover assets and liabilities from reinsurers, she added.

Charlie Finch, partner at specialist pension consultancy LCP, said funded reinsurance has gained popularity as it has helped insurers improve the pricing of the schemes they offer, but calls for insurers to provide better and more consistent disclosure about their use of the tool. I did.

Insurers have defended this practice as a risk-sharing mechanism.

L&G said reinsurance was a small part of its 86 billion pension book. [worked] Working with a select panel of reinsurers, we have actively engaged with clients and regulators on the use of reinsurance.

Phoenix's chief executive, Andy Briggs, told the FT in its annual results in March that the group had a diverse range of strategies. [reinsurance] A counterparty that is financially strong and has strong collateral covenants.

this money [backing funded reinsurance deals] “It’s not going away,” said David Richardson, CEO of Just, which closed more than 400 million transactions last year. This goes into a ring-fenced collateral account that we charge, and there is a limit to the amount. [the reinsurer] You can invest.

Aviva declined to provide figures on usage, saying it was a small part of our portfolio. PIC declined to comment.

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