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The BOE is about to conduct a stress check on insurers to guage their publicity to reinsurers, reported the Monetary Occasions, citing sources.
The transfer comes as issues develop concerning 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 partaking in transactions that cross on a portion of those liabilities, together with the corresponding belongings, to reinsurers.
These reinsurers are sometimes primarily based offshore in places resembling Bermuda.
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As per the sources, the PRA’s stress check for the next yr will embody 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 have been initially put aside.
In a typical funded reinsurance deal, insurers switch key dangers resembling asset or longevity danger to the reinsurer, together with sure belongings as collateral, following particular funding pointers.
There’s a chance that authorities bonds could possibly be exchanged for different non-public credit score belongings as reinsurers search increased yields.
World 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 an announcement, the PRA mentioned it could “proceed to observe how market apply evolves in relation to funded reinsurance and can maintain beneath evaluate whether or not additional measures are required”.
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