Big UK life insurers triple use of controversial reinsurance deals

Big UK life insurers tripled the amount of assets they offloaded to global reinsurers last year, underlining their increasing reliance on a risk-sharing practice that has drawn scrutiny from the Bank of England and pension trustees.

Most large insurers in the booming market for corporate pension scheme transfers pass on a slice of the pension assets and liabilities they assume from company balance sheets to reinsurers, typically overseas.

Information provided by the insurers to the Financial Times and company reports showed that the insurers conducted at least £6bn worth of funded reinsurance deals, up from at least £1.9bn in 2022. They were led by FTSE 100 insurer Legal & General, which did £3.2bn, while listed peer Phoenix Group did £1.2bn and privately owned Pension Insurance Corporation £1.3bn. 

The Bank of England has warned of significant risks to the sector from the surge in funded reinsurance deals, and is consulting on tighter rules. Regulators worldwide are increasingly scrutinising how assets ceded to life reinsurers are invested, and the degree of liquidity and other risks being taken.

Pension trustees have also raised the alarm on the implication for savers’ benefits if these arrangements — on which there is limited public disclosure — were to fail. 

One pension trustee said a lack of transparency about funded reinsurance meant fund governors were handing over billions of pounds in scheme assets to life insurers whose financial structure “they do not understand but are told is ‘iron clad’”. 

“In what fiduciary management world is it acceptable to give other people’s money to an entity where you don’t understand the risk . . . and that entity can transfer its liability to you to a third party without your agreement,” the trustee said.

The BoE’s Prudential Regulation Authority declined to provide sector-wide data, but is planning a stress test of firms’ funded reinsurance arrangements next year. It has also proposed counterparty limits and other risk-management steps.

The regulator’s Lisa Leaman said in a speech last month that the motivation for funded reinsurance deals was sometimes to invest in assets that might not be eligible as a match for insurers’ liabilities under UK rules. That can create “potential risks and capital strain” in the event that an insurer was forced to recapture its assets and liabilities from a reinsurer, she added.

Charlie Finch, a partner at pensions specialist consultancy LCP, said funded reinsurance had become popular with insurers to help them improve the prices they offer schemes, but called for insurers to provide “better and more consistent disclosure” on their use of the tool.

Insurers have defended the practice as a risk-sharing mechanism.

L&G said funded reinsurance was a “small proportion” of its £86bn annuity book and it “[worked] with a carefully selected panel of reinsurers and engaged actively with clients and our regulator on our use of reinsurance”.

Phoenix chief executive Andy Briggs told the FT at its full-year results in March that the group had a “broad range of [reinsurance] counterparties” that were financially robust and had “strong collateralisation arrangements in place”.

“This money [backing funded reinsurance deals] doesn’t disappear,” said David Richardson, chief executive of Just, which did more than £400mn of such deals last year. “It goes into a ringfenced collateral account over which we have a charge, and there will be limits around what [the reinsurer] can invest in.”

Aviva declined to provide a number on its usage, saying it was a “small part of our portfolio”. PIC declined to comment.