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By Huw Jones
LONDON, Feb 17 (Reuters) - Britain's insurers should notreinsure themselves against people living longer in the beliefthat it will directly reduce the amount of capital they arerequired to hold, the Bank of England said on Wednesday.
Life insurers often insure themselves against so-calledlongevity risk -- the risk of increasing life expectancyresulting in higher than expected pension pay outs.
New EU "Solvency II" rules introduced last month giveinsurers an extra incentive to mitigate longevity risk by way ofreinsurance to lessen capital requirements, said Andrew Bulley,director of life insurance at the BoE's Prudential RegulationAuthority.
However, he said such reinsurance policies would bescrutinised to ensure that they are not being used to get aroundthe new capital rules.
"We will be monitoring closely if firms become active inthis market consistently and solely for reasons other thanseeking genuine risk transfer," Bulley told an industry event.
Insurers may not be holding enough capital even though theyhave reinsured themselves against longevity risks, Bulley added.
Bulley said the PRA sent a letter to directors of insurerson February 9 saying it expects to be notified of proposedlongevity risk transfer and hedge transactions "well in advanceof a firm completing such a transaction.
Meanwhile, the "brave new world" promise of harmonisedcapital requirements across Europe had not yet been perfected,Bulley said.
"It was perhaps unrealistic to expect a single big bangreform that imposed, overnight, a complete uniformity of capitaladequacy calculation on a patchwork of national regimes," Bulleysaid.
Large insurers were given approval by the PRA to use modelsto calculate how much capital to hold.
He said the UK life insurance sector has been adequatelycapitalised, and he wanted to "dispel any notion" that the PRAwants insurers to hold far more capital than required than theminimum "solvency capital ratio" or SCR under the EU rules.
"In practice, firms have revealed a clear preference tooperate some way above their SCR, not least to meet ratingrequirements and to provide a margin of safety against aninadvertent or unforeseen breach," Bulley added. (Reporting by Huw Jones; Editing by Keith Weir)
