LONDON (Reuters) – British life insurance companies which provide insurance for defined benefit or final salary pension schemes – known as bulk annuities – should limit exposure to reinsurers because of possible counterparty risk, the Bank of England’s Prudential Regulation Authority said on Thursday.
The life insurers, which include FTSE 100 players Aviva, Legal & General and Phoenix, share the investment risk of bulk annuities with reinsurers, which tend to be based outside Britain and may include private equity firms.
Life insurers may be underestimating the counterparty risks in these arrangements, Charlotte Gerken, executive director for insurance supervision at the BoE said in a letter to life insurance chief risk officers earlier this year.
“The PRA proposes that firms should set limits to their exposures to funded reinsurance counterparties,” it said on Thursday.
The reinsurance counterparties may be highly exposed to illiquid assets and their investment profiles may be too closely correlated to one another, the regulator said.
The regulator also said that given the growth in the bulk annuity market, as companies seek to offload pension schemes from their balance sheets, life insurers may be placing more investments with the reinsurers “without adequately recognising the inherent uncertainties and risks involved.”
Global watchdog the International Association of Insurance Supervisors has also been looking into the so-called “funded reinsurance” market, the PRA said.
Other players are looking to enter the UK bulk annuity market, pensions consultants said, as it currently only has eight providers. But consultants also point to the cost and regulatory barriers in setting up a UK life insurance business.
The bulk annuity market has been running at around 30 billion pounds ($37.16 billion) a year, though consultants expect a record year in 2023.
Private equity group Brookfield is weighing entering the sector through its affiliate Brookfield Reinsurance, Reuters reported last month.
($1 = 0.8073 pounds)
(Reporting by Carolyn Cohn and Huw Jones. Editing by Jane Merriman)