In a letter to Chief Government Officers (CEOs), the Financial institution of England (BoE) has mentioned that it continues to “pay shut consideration to the position of funded reinsurance within the UK life market,” amid continued progress within the nation’s life insurance coverage sector and robust demand within the bulk buy annuity (BPA) market.

The BoE has reiterated that it solely sees a restricted position for funded reinsurance as a part of a diversified asset technique.

Funded reinsurance is the switch of funding threat and asset threat to a reinsurer and is utilized by UK insurers to assist handle the pension threat they assume by way of BPA transactions. Demand for BPA offers has risen significantly, and because of this, insurers are more and more seeking to share a number of the publicity with the funded reinsurance sector.

Final June, the BoE wrote to Chief Danger Officers to focus on a number of the key dangers about the usage of funded reinsurance.

In November, following fast progress within the UK BPA market, the BoE’s Prudential Regulation Authority (PRA) proposed stricter pointers for all times insurers utilising these preparations.

Now, in a letter to CEOs outlining its insurance coverage supervision priorities for the yr forward, the BoE has instructed that it’s going to develop new measures and insurance policies to mitigate its considerations over the heightened use of funded reinsurance by life insurers.

“We contemplate systematic use of funded reinsurance has the potential to introduce vital dangers to our goals of security and soundness and policyholder safety,” reads the letter to CEOs.

“These are complicated transactions which give rise to contingent publicity through recapture threat, and it’s important companies restrict the size and construction of such transactions to retain excessive confidence of their capability to securely recapture the transferred dangers underneath pressured circumstances,” continues the letter.

The letter goes on to state that by way of thematic work, the BoE has recognized threat administration weaknesses throughout life insurers transacting funded reinsurance.

“Given the potential firm-specific and systemic dangers, the Prudential Regulation and Monetary Coverage Committees will preserve funded reinsurance underneath overview and we count on to develop additional coverage and supervisory measures sooner or later,” says the BoE.