Funded Re can support greater new business volumes in bulk annuity market: Aon

According to a recent report from Aon, with appropriate risk controls in place, Funded Reinsurance (Funded Re) transactions can support greater new business volumes in the bulk annuity market over time.

This statement from Aon follows the Prudential Regulation Authority (PRA) Supervisory Statement on 26 July 2024, which was issued with a letter to UK life insurers and focused on the use of Funded Re across the industry.

For those unaware, Funded Re is a form of collateralised quota share reinsurance contract which transfers part or all of the asset and liability risks associated with a portfolio of annuities to a third party.

It has long been noted that the UK life insurance sector could face a significant rise in balance sheet risks if Funded Re controls were not put in place.

Now though, with the PRA’s new guidance in effect, insurers are required to provide various reports by 31 October 2024, including a summary of any areas of existing non-compliance.

Under the new requirements, insurers are also required to adopt prudent risk management frameworks concerning Funded Re transactions, along with greater ongoing disclosure to the PRA.

S&P Global Ratings recently welcomed the PRA’s new measures to control the spike in Funded Re transactions, believing they will mitigate the associated risks if implemented properly.

In its new report on the matter, Aon stated, “We believe FundedRe can help support bulk annuity capacity in the UK during a period of significant demand from defined benefit pension schemes.

“We welcome the Supervisory Statement from the PRA to formalise the risk management framework for FundedRe transactions. The new requirements do not go as far as setting explicit limits on the use of FundedRe, but instead rely on the framework of strong and prudent risk management and on PRA oversight.”

The firm continued, “The PRA has clearly set expectations that it will seek greater risk management controls if it is not sufficiently reassured by insurer behaviour. Whilst the new requirements are a positive step, we continue to be concerned about the lack of public disclosure from insurers regarding FundedRe. We hope the continued attention to this area leads to more public disclosure to provide greater reassurance to customers.

“Despite the lack of disclosure, it is clear that insurers already do spend considerable time on risk controls in this area, and the PRA requirements should drive more consistency in their stringency.”

Aon concluded, “Finally, we expect that this is an area that will continue to evolve, as the PRA continue to keep a close eye on developments and as the market continues to innovate to support the strong demand for bulk annuities. Early indications from insurers are that this latest set of developments is unlikely to have a material impact on pricing.

“However, we do expect that trustees and sponsors will want to carefully consider appropriate insurer due diligence before and following their transaction – including the role of FundedRe as a component of overall risk exposure.”

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