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The BOE is about to conduct a stress check on insurers to judge their publicity to reinsurers, reported the Monetary Instances, citing sources.
The transfer comes as issues develop relating to the dangers that offshore reinsurance preparations could pose to UK retirement savers.
The Prudential Regulation Authority (PRA) of the BOE, which oversees insurers, has beforehand highlighted “important potential dangers” related to the systematic use of funded reinsurance offers.
UK firms are transferring round £50bn ($62.7bn) yearly in pension liabilities to insurers, a pattern accelerated by rising rates of interest and improved pension scheme funding ranges.
To facilitate extra offers and unlock capital, insurers are more and more participating in transactions that go on a portion of those liabilities, together with the corresponding belongings, to reinsurers.
These reinsurers are sometimes based mostly offshore in areas similar to Bermuda.
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As per the sources, the PRA’s stress check for the next 12 months will embrace an “exploratory situation” to mannequin the affect on insurers of a possible failure of their funded reinsurance preparations.
This situation is prone to simulate the collapse of a well-funded reinsurer, which might end result within the main insurer reassuming the pension dangers with out the belongings that had been initially put aside.
In a typical funded reinsurance deal, insurers switch key dangers similar to asset or longevity danger to the reinsurer, together with sure belongings as collateral, following particular funding pointers.
There’s a risk that authorities bonds might be exchanged for different non-public credit score belongings as reinsurers search greater yields.
International regulators have heightened their scrutiny of those agreements, particularly when collateral strikes offshore and escapes the purview of nationwide regulatory our bodies.
The PRA has additionally proposed setting limits on the variety of funded reinsurance offers insurers can undertake with particular person counterparties and has demanded notification of any important transactions on this space.
In a press release, the PRA stated it will “proceed to observe how market follow evolves in relation to funded reinsurance and can hold underneath assessment whether or not additional measures are required”.
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