Unlock the Editor\u2019s Digest for free<\/p>\n
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/p>\n
The Bank of England is hardening its approach to the use of complex offshore financing by UK life insurers to lower capital requirements on the pension portfolios they are taking on from companies.<\/p>\n
Vicky White, the BoE\u2019s director of prudential policy, used a speech<\/a> on Thursday to give the clearest signal yet that the central bank plans to curb the industry\u2019s use of offshore reinsurance deals.<\/p>\n In these \u201cfunded reinsurance\u201d deals, both insurance liabilities and the assets backing them are ceded to a reinsurer, often in a foreign jurisdiction such as Bermuda. The BoE is worried that this is a form of \u201cregulatory arbitrage\u201d that allows insurers to cut the capital they have while the risk remains the same.<\/p>\n White said insurers have taken advantage of \u201ca quirk in regulatory treatments\u201d to reduce the capital they have to cover pension liabilities, adding that the BoE\u2019s aim was \u201cmaking sure that we act now to get the treatment right for the future\u201d.<\/p>\n Talking at a Bank of America event in London, she said the bank also worried these offshore deals were \u201cdriving investment away from those UK productive assets which support the growth of the UK economy, and towards internationally based reinsurers\u201d.<\/p>\n Potential changes include \u201cexplicit regulatory restrictions or limits on the amount and structure\u201d of funded reinsurance, she said, adding that the BoE could also consider \u201cmeasures to address any underestimation of risk, or potential regulatory arbitrage\u201d.<\/p>\n UK life insurers had agreed at least \u00a36bn of funded reinsurance deals as of last year<\/a> and White said the market was growing \u201cvery fast\u201d.<\/p>\n The BoE\u2019s decision to act is an admission that its \u201cprinciples-based approach\u201d \u2014 relying on broad expectations and guidance rather than hard rules \u2014 is not working in this case, where US private capital groups have moved into the market.<\/p>\n Apollo, Brookfield and Blackstone, which have a large presence in the Bermuda insurance market, have all expanded into the UK \u201cbulk annuities\u201d business, where companies offload their pension liabilities and the assets backing them to insurers.<\/p>\n In July, Apollo-backed insurer Athora said it was planning a \u00a35.7bn acquisition of the privately owned Pension Insurance Corporation<\/a>, while Brookfield announced a \u00a32.4bn deal for Just Group, and Blackstone has agreed an up to $20bn partnership with L&G.<\/p>\n \u201cIf you\u2019d turned back time,\u201d said one insurance lawyer, \u201cAmerican private capital groups would have said, we\u2019ll keep an eye on owning an annuity company directly but we\u2019d rather do it by reinsurance out of the US or Bermuda, because that\u2019s much cleaner. We don\u2019t have to get our hands dirty with insurance policies or deal with millions of pensioners. We just like to get big pools of assets and invest them.\u201d<\/p>\n However, as regulators have issued multiple<\/a> warnings<\/a> on the risks of funded reinsurance, the lawyer said the groups are changing their strategy by coming into the market directly.<\/p>\n The bulk annuities market is booming, with UK demand for such deals expected to reach \u00a3500bn over the next decade, according to consultancy LCP.<\/p>\n BoE officials are concerned that the rules on how offshore reinsurers manage the collateral backing millions of British pensions are weaker than UK regulations.\u00a0<\/p>\n White said officials had found \u201cexamples of large cash flow mismatches, as well as large unhedged currency exposures in current FundedRe transactions, far beyond what we would see in typical UK annuity firms\u2019 direct investments\u201d.<\/p>\n The BoE will discuss its concerns with the industry \u201clater this autumn\u201d, White said, adding that it had \u201cnot come to any firm views\u201d. <\/p>\n","protected":false},"excerpt":{"rendered":"Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this…\n","protected":false},"author":2,"featured_media":153700,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[64,63,99,186,184,185],"class_list":{"0":"post-153699","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-au","9":"tag-australia","10":"tag-business","11":"tag-finance","12":"tag-personal-finance","13":"tag-personalfinance"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/153699","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=153699"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/153699\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/153700"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=153699"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=153699"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=153699"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}