17 February 2016

Reuters: BoE cautions insurers over higher life expectancy reinsurance

Britain's insurers should not reinsure themselves against people living longer in the belief that it will directly reduce the amount of capital they are required to hold, the Bank of England said.

Life insurers often insure themselves against so-called longevity risk - the risk of increasing life expectancy resulting in higher than expected pension pay outs.

New EU "Solvency II" rules introduced last month give insurers an extra incentive to mitigate longevity risk by way of reinsurance to lessen capital requirements, said Andrew Bulley, director of life insurance at the BoE's Prudential Regulation Authority (PRA).

However, he said such reinsurance policies would be scrutinised to ensure that they are not being used to get around the new capital rules.

"We will be monitoring closely if firms become active in this market consistently and solely for reasons other than seeking genuine risk transfer," Bulley told an industry event.

Insurers may not be holding enough capital even though they have reinsured themselves against longevity risks, Bulley added.

Bulley said the PRA sent a letter to directors of insurers on February 9 saying it expects to be notified of proposed longevity risk transfer and hedge transactions "well in advance of a firm completing such a transaction.

Meanwhile, the "brave new world" promise of harmonised capital requirements across Europe had not yet been perfected, Bulley said.

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Andrew Bulley speech

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