The Prudential Regulation Authority has issued its latest policy statement on funded reinsurance, highlighting a major shift in the regulation of such transactions.

James Eisden (pictured above), insurance partner at KPMG in the UK, spoke about the implications for life insurers.

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“The Prudential Insurance Regulatory Authority today confirmed that it is putting an end to the use of funded reinsurance. Expectations seem to suggest that life insurers will radically rethink the scale, complexity and risk management associated with funded reinsurance transactions,” said Isden.

“Firms have until the end of October to submit a convincing plan to their supervisors. It is now up to insurers to decide how to balance the use of funded reinsurance, alongside enhanced regulatory considerations for these arrangements, with the threat of further intervention if the Prudential Regulatory Authority is not happy with the outcome,” he said.

Read more: Is there a justification for increased scrutiny of funded reinsurance?

The Prudential Regulation Authority’s latest policy statement responds to the comments made in Consultation Paper (CP) 24/23 on funded reinsurance. The final policy is set out in Supervision Statement (SS) 5/24, included in Appendix 1 to the policy statement.

The Prudential Regulatory Authority acknowledged the comments of CP24/23 and made several significant amendments to the draft policy. The key changes include:

• An explanatory statement that allows companies to consider the diversity of reinsurance parties funded and the risks associated with them.
• Guidelines on setting limits on inward investment, particularly with regard to the maximum unilateral redemption.
• Amendments to collateral policies to clarify the nature of collateral assets and documentation requirements.
• Increased expectations for board involvement in recovery plans.
• Clarifications on managing uncertainty in the outputs of the internal model for funded reinsurance.
• Guidance on the Prudential Regulation Authority’s view on the time horizons of collateral mismatch risks.
• Modifications to the use of side haircuts.

The Prudential Regulation Authority’s amendments reflect its commitment to ensuring that funded reinsurance transactions are managed with greater scrutiny and transparency.

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