The Bank of England is monitoring the trend of UK pension fund or insurer longevity risk and liabilities going offshore through reinsurance transactions, such as longevity swaps, as non-EU re/insurers can hold less capital against longevity risk, according to a report from Bloomberg.
Citing an unnamed source, Bloomberg explained in this article today that the Bank of England is said to be “uneasy” about the trend for UK pension funds and insurers to transfer their liabilities to insurers or reinsurers outside of the European Union.
These non-EU insurance and reinsurance firms are not bound by the same capital rules, as they are outside of Solvency II regulation, enabling them to hold less capital against liabilities such as longevity exposure.
Bloomberg says that its source explained that the Bank of England wants to ensure that policyholders, and pensioners, are protected if a non-EU insurer or reinsurers balance sheet came under pressure.
Looking at the list of longevity swaps and reinsurance transactions that we’ve cover here at Artemis, a significant amount of the UK related pension or insurer liabilities are going outside the EU.
Any additional oversight from UK regulators on foreign insurers and reinsurers is probably something that is happening across the board. The Bank of England is likely also looking at issues such as UK homeowners, liability or life insurers, that reinsure themselves outside the EU as well, as the same issues of different regulatory capital requirements will apply.
Longevity risk and anything attached to pensions and life are likely to receive the most attention though, as that’s where the UK’s population could face the most direct risk if a major re/insurer of UK pensions failed, for example.
There is a question attached to this issue, of whether those in a regulatory environment where the capital levels held can be lower, are therefore able to be the cheapest providers of reinsurance capacity. If so that could result in increasing amounts of longevity, and other such risks, going offshore to non-EU re/insurers where the capital rules enable them to be a little more efficient.
However, looking at who has taken on the most longevity risk from around the world in recent years, it does tend to be the bigger life re/insurer players with larger books of mortality risk, to enable them to hedge their liabilities between the longevity and mortality side.
Perhaps as the natural hedge becomes more balanced for these players, as the longevity risk transfer market continues to grow, the benefits of being in a lighter regulatory capital regime could come more to the fore, which might explain the Bank of England’s recent interest.