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Solvency II: PRA warns firms against using reinsurance to ease capital demands

Life insurers should not transfer longevity risk to reinsurers in an attempt to lower capital requirements under Solvency II, according to the Prudential Regulation Authority (PRA). 


18 FEBRUARY 2016 | BY CINTIA CHEONG

A cake with 100 candles © iStock
It is a common practice for companies to reinsure themselves against the risk of people living longer. © iStock


Andrew Bulley, director of life insurance at the PRA, said it was a common practice for firms to reinsure themselves against the risk of people living longer.

However, Solvency II potentially gives an additional incentive for them to do so in order to ease the requirement to hold capital, he added.

Speaking at an event organised by the Investment and Life Assurance Group, in London, Bulley said the PRA would keep an eye on longevity risk deals. 

“We will be monitoring closely if firms become active in this market consistently and solely for reasons other than seeking genuine risk transfer,” he said. 

He warned such transfers may not be completely safe, adding: “Should an insurer transfer risk to a single or small number of reinsurers, it inherently exposes itself to counterparty credit risk and, potentially, substantial concentration risk.”

Bulley said he, and his counterpart on general insurance, Chris Moulder, sent a letter to directors on 9 February. According to the letter, the PRA expects to be notified of proposed longevity risk transfer and hedge transactions and the firm’s recommended approach to risk management “well in advance of a firm completing such a transaction”.

He also mentioned the PRA approved 19 internal model applications from UK firms at the end 2015, but expected to see a “second wave” of model applications this year. 

He added: “For those who do not have an internal model but are looking to make an application over the course of this year, the PRA will endeavour to make the model review process as smooth and transparent as possible through providing timely and comprehensive feedback, just as we did in 2015 and before that.”

Meanwhile, the PRA has published an updated supervisory statement which sets out how it expects firms to submit information using product reporting codes when applying to use an internal model or partial internal model.