BOE Said Uneasy About Foreign Insurers' Pension Liability Deals

  • BOE monitoring insurers outside EU who can avoid Solvency II
  • At least 10 deals in past two years won by non-EU reinsurers

The Bank of England is monitoring insurers from outside the European Union that are winning pension liability business in the U.K., a person familiar with the matter said.

By not having to comply with Solvency II regulations, insurers from outside the 28-nation political bloc can offer lower reinsurance pricing by holding less capital against longevity risk. The BOE is uneasy because it wants to ensure that policyholders are protected if the balance sheet of a non-EU insurer comes under pressure, said the person, who asked not to be identified because the matter is private. A spokeswoman for the BOE declined to comment.

U.K. insurers and pension funds are buying reinsurance to help ease capital requirements before the new laws are introduced and to protect against the chance that their policyholders live longer than forecast. Non-EU companies including Prudential Financial Inc., Reinsurance Group of America Inc. and Swiss Re have won at least 10 of the last 14 U.K. transactions tracked by Artemis.

“There are several other deals which are likely to complete before the end of the year because of this phenomenon going on at the moment,” said Douglas Anderson, a partner at industry consultant Hymans Robertson LLP.

Holding less capital to offer lower prices, an example of regulatory arbitrage, enables insurers to take advantage of loopholes in the global financial system. To safeguard pensions, the BOE currently liaises with other countries’ regulators and places the responsibility of how to manage counter-party credit risk on the U.K. pension provider.

The BOE’s decision to look into the activity comes as it races to approve insurers’ capital models before Solvency II comes into effect in January. The new laws require insurers operating within the EU to hold more capital against certain risks including longevity.

Among the latest transactions, Newark, New Jersey-based Prudential won a deal in August with Legal & General Group Plc to cover $2.9 billion of its liabilities. Swiss Re in September won the right to reinsure part of a 2.4 billion-pound longevity transaction for Heineken NV’s Scottish & Newcastle Pension Plan.

Spokesmen from Swiss Re, Prudential and Legal & General all declined to comment. Spokesmen for RGA, the Scottish & Newcastle Pension Plan and Heineken were not immediately available to comment.

“Insurance companies are incentivized to look at more efficient ways of capitalizing their balance sheets which includes reinsuring longevity risk,” Anderson said. “The question then becomes who is going to give them the most competitive price for that, which seems to be firms who don’t have to hold as much capital.”

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