UK warns on funded reinsurance for counterparty and correlations risks

The UK is considering tightening the regulatory regime around which UK insurers take on funded reinsurance arrangements, backed by defined asset portfolios, given rising counterparty and correlations risks.

Policymakers at the UK’s regulatory office PRA note a growing appetite for funded reinsurance arrangements in the UK life insurance market to support the writing of bulk purchase annuity business.

That brings “significant potential risks,” including the potential for “excessive concentrated exposures” to correlated, credit-focused counterparties, the PRA warned.

New players flooding into the funded reinsurance business may bring a more heavy focus on credit returns and be more exposed to illiquid investments, including those privately originated by affiliated alternative asset managers, the PRA notes. Such funded reinsurers could have outsize portfolio overlap and correlated default risk, the PRA warned.

To counter the risk, the PRA is proposing extending some investment-side rules to funded reinsurance arrangements, placing limits on exposures to funded reinsurance counterparties and adjusting solvency capital requirements on the deals.

The PRA is proposing its new rules, now open for consultation with the industry, go into effect in Q2 2024.

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