New regulatory measures for Funded Re to enhance resilience of insurers: S&P

S&P Global Ratings has observed that the introduction of new measures covering funded reinsurance (Funded Re) by the U.K. and Bermudian regulators will enhance the resilience of insurers.

s&p-logo-newAs per a new report by S&P, record surplus positions at defined benefit pension schemes have allowed many companies to reduce their pension risk exposure. Trustees are now reportedly able to negotiate for an insurance solution from a position of “relative strength”.

“In the U.K. alone, the annual premium for bulk purchase annuities (BPA) was about £50 billion in 2023 and lucrative growth prospects have attracted new players to the market,” S&P added.

To harness the market’s growth potential, the rating agency explained that some insurers are choosing to cede both the longevity and asset risk obtained via these BPA transactions to reinsurers through Funded Re transactions.

For those unaware, Funded Re is a form of collateralised quota share reinsurance contract which transfers part or all of the asset and liability risks associated with a portfolio of annuities to a third party.

According to S&P, Funded Re has garnered more press and regulatory attention as it has become more prevalent over the past few years.

“That said, it comprises only a small portion of the total outstanding reserves ceded to reinsurers for the U.K. BPA market. Attitudes toward Funded Re differ among BPA players,” the rating agency’s report noted.

The firm’s report also stated that in 2023, some players ceded as much as 30% of their BPA premium via Funded Re, indicating an increasing appetite for this type of transaction. Meanwhile, others have yet to cede any of their premium via Funded Re.

S&P concluded, “Although it is still far more common for insurers to transfer only longevity risk to reinsurers, the U.K. and Bermudian regulators have already introduced new measures covering Funded Re.

“S&P Global Ratings considers that these measures will enhance the resilience of insurers. The new measures will contribute to stronger and more consistent risk management relating to Funded Re transactions.”

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