The Bank of England’s Prudential Regulation Authority (PRA), which oversees insurers, is planning an extensive stress testing program next year focused on the rapidly expanding practice of life insurers offloading pension scheme risks to overseas reinsurers, according to sources familiar with the plans.
The PRA warned last year that the accelerating trend of insurers transferring slices of pension liabilities and attached assets to offshore reinsurers in so-called “funded reinsurance deals” potentially poses systemic risks. Now the regulator is aiming to rigorously model the impacts on insurers if these opaque arrangements, which have seen assets flowing into thinly-capitalized Bermuda-based reinsurers, were to collapse.
The planned stress test scenarios are expected to assess the fallout if a major reinsurer counterparty involved in the deals were to fail. This would force the pensions risks back onto the books of UK insurers, potentially without all the assets that had been set aside to cover the liabilities. The PRA is concerned that in stressful markets, some of the assets put up as collateral by reinsurers could prove tough to sell to meet pension obligations. Additionally, you can also read about 2024’s Top CD Investment Strategy.
The stress tests reflect growing unease over a deluge of UK pension schemes being offloaded from corporate balance sheets onto insurers, running at about £50 billion per year. As insurers take on more deals, they are leaning heavily on reinsurers to take slices off their hands. But the systemic threat looms that the reinsurance capacity could prove inadequate during a crisis.
Insurers defend the arrangements as part of their risk management toolkit to back pension promises. But regulators worry opacity and interconnectedness risks are building in the system. The PRA has already demanded insurers seek approval for large reinsurance deals and proposed setting limits on individual reinsurer exposures.
Analysts state the stress tests are long overdue to assess the resilience of the vital insurance backstop for British retirement savings against potential cracks appearing in the global reinsurance system. The planned assessments will probe whether domestic regulators have fallen behind the curve in tracking exposures.
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