As recently revealed on 16 November, 2023, the UK Prudential Regulatory Authority (PRA) has released draft measures to tackle believed risks associated within the funded reinsurance market. This market is largely utilised as a piece within transactions which pivot pension scheme liabilities over to insurers.
Funded reinsurance is a crucial element in the process known as the Bulk Purchase Annuity (BPA), which is commonly employed in the UK. This procedure allows for the transferring of defined benefit pension scheme risks from companies to insurance companies via a purchase of a group annuity policy.
Funded Reinsurance’s Role in BPA
The role of funded reinsurance within the BPA procedure is significant. Specifically, in the most common approach, an insurer providing a Bulk Annuity will typically purchase a reinsurance policy to manage the longevity risk associated with the transferred pension liabilities.
The intended effect of these measures by PRA is to provide a paradigm of tightened regulation on the use of funded reinsurance in BPA transactions. This will potentially impact those companies that have large defined benefits schemes and the insurers who provide coverage for these schemes.
The PRA’s recently released draft measures inherently indicates the agency’s rising concerns about the continued growth in the scale and complexity of BPA transactions, alongside the continued reliance on one form of risk mitigation, funded reinsurance.
For more information on this topic, please visit Skadden, Arps, Slate, Meagher & Flom LLP.