Bank of England threatens curbs on use of 'funded reinsurance'

LONDON, July 26 (Reuters) - Britain's insurers could face curbs on how they undertake acquisitions of certain pension schemes unless they manage risks better, the Bank of England said on Friday.

Large UK insurers such as Legal & General, Aviva and Phoenix have cashed in on demand for bulk annuities, insurance for defined benefit, or final salary pension schemes.

In a fast growing area, the life insurers take on the scheme's assets and guarantee payments to pensioners, removing pension scheme risk from company balance sheets, with funded reinsurance (fundedre) obtained from reinsurers based overseas to underpin such deals. This has raised concerns at the BoE's Prudential Regulation Authority (PRA).

"Without material improvements, the PRA is concerned that UK insurers may use FundedRe, in volume and complexity, in a way that is not consistent with prudent risk management," Gareth Truran, BoE executive director for insurance supervision, told insurance CEOs in a letter published on Friday and accompanying a formal policy statement.

Truran said he will "monitor closely" how funded reinsurance is used and managed, and the PRA's next stress test of life insurers next year will cover this activity to "help inform our views on the development in the market".

"This could include, for example, consideration of explicit regulatory restrictions on the amount and structure of FundedRe, or measures to address any underestimation of risk, or regulatory arbitrage, inherent in these transactions," Truran said.

The PRA said it has asked the insurers to complete a self-analysis assessment by Oct. 31, setting out current risk management practices related to fundedre, and what timeline they have for implementing any improvements.

"Your responses will be used to inform both our supervisory engagement with you on these issues over the coming months, and the PRA’s assessment of the case for further measures in this area," Truran said.

The market saw a record 50 billion pounds ($64 billion)in deals last year, and is expected to post a similar volume in 2024.

The International Association of Insurance Supervisors has said it is investigating life insurers' increasing exposure to funded reinsurance.