Roundtable: Life reinsurance – February 2023

A panel of life reinsurance professionals from UK-based reinsurance companies joined Milliman in February 2023 for a roundtable discussion on regulation in the UK and other matters of interest. In this, the second of these roundtables, the discussion focussed on the post-Brexit regulatory environment for UK life branches, implications for the life insurance (and by extension the life reinsurance) industry following the Dear CEO¹ letter setting out the priorities of the Prudential Regulation Authority (PRA) for 2023 and to share the experience of dealing with the regulator before and after third-country branch (TCB) authorisation.

This discussion was conducted under the Chatham House rules (i.e., comments are anonymous and non-attributable) and below we summarise key points from this in-person meeting. We would like to thank all those who took part for their time.

Participants

Six professionals representing three global reinsurers that operate in the UK.

Facilitated by Dilesh Patel, Adél Drew and John Jenkins of Milliman.

Notes

The PRA has mentioned that it will continue to ensure authorisation of branches of international insurers and complete the assessment of any outstanding branches currently in the temporary permissions regime (TPR). What has the overall experience been with respect to gaining authorisation from the PRA and interaction with PRA in general?

All firms represented at the roundtable have now received TCB authorisation. The experience of becoming authorised varied amongst participants. Those seeking an early authorisation had a relatively onerous experience compared to those who received authorisation later, which likely reflects the experience the regulator gained during the process.

It is understood from the experience of participants that the PRA uses a home office geographical or regional categorisation when assigning supervisors to TCBs; thus, all the German-based reinsurers have the same supervisory contact. Authorised firms are also assigned a category number as defined by the “Potential Impact”² assessment by the PRA.

Post-authorisation, reinsurers and the regulator have settled into a regular rhythm of keeping in touch, with twice-yearly meetings between the assigned supervisor and branch manager.

All participants are subject to a lighter-touch submission approach, with a cutdown version of the Quantitative Reporting Templates (QRTs) submitted to the PRA which has significantly eased the reporting burden. Additionally, all participants have submitted, or intend to submit, group-level Regulatory Supervisory Reports (RSRs), with full reports every three years and updates or addenda upon any material changes in the interim.

However, there was some divergence of approach regarding Own Risk and Solvency Assessments (ORSAs). Two participants submitted group-level ORSAs, one with a branch addendum, while another, under the temporary permissions regime (TPR), chose to submit a standalone document with significant referencing of the group-level document. Going forward, the participant which submitted a group ORSA with a branch addendum intends to switch to a full standalone branch ORSA.

Participants also discussed whether the same documents submitted to the home regulator are also submitted to the PRA, and it was noted that there have been issues arising from some home state regulators with the sharing of group regulatory documents with the PRA. There was general agreement that the PRA’s relationship with various other supervisory authorities will be key to the ongoing success of TCBs operating in the UK.

Lastly, a participant raised the approach to senior management functions (SMFs), and to their impression that the PRA is seeking to concentrate accountability with the branch manager. There was consensus on this point, and acknowledgement that the PRA has requested only two SMFs be registered by each participant.

The PRA has mentioned a focus on reinsurance risk in its 2023 priorities, a topic which was also mentioned in a speech by Charlotte Gerken³ of the PRA last year. There is an increased focus on longevity and annuity business, including concerns on mass recaptures, concentration risk and offshore reinsurance. Do you have thoughts on this?

Participants could understand the rationale behind the focus on reinsurance risk by the PRA, particularly when considering funded reinsurance where assets are transferred to another entity. It was thought that the concerns have arisen due to an increase in the use in this context of monoline reinsurers as opposed to multiline global reinsurers, as represented by this roundtable discussion. A multiline global reinsurer generally has a more diverse risk profile and can recapitalise or reallocate capital if a particular line of business performs poorly. However, this is perhaps not the case for monoline reinsurers.

There was also a view that these transfers take place to reinsurance entities which are not based in the UK and where some aspects of the capital requirements may be less onerous than in the UK. Some participants felt that that the current UK Solvency II equivalence of some overseas regimes could come under scrutiny in future.

It was also noted that the timings of the comments made about reinsurance risk tie in with the discussions which have been and are taking place on the UK Solvency II reforms on the matching adjustment (MA), whereby insurers could avoid tighter rules around the matching adjustment by transferring the assets involved elsewhere.

One participant commented that the PRA attention on risks arising from reinsurance has the potential to cause reputational damage to the wider reinsurance industry, when the focus is perhaps better placed on a subset of reinsurers in the market.

The other potential consequence of this focus by the PRA could be increased questions from direct writers and a desire to change existing terms on recapture provisions. Additional questions from direct writers could also arise in other areas as a result of the PRA priorities for 2023, such as recovery and resolution planning.

The PRA has also discussed risk management as an area of focus in its 2023 priorities—looking at how firms respond to changing risk conditions that have prevailed for a long time, with a particular focus on how well a firm’s capital models operate in conditions that differ substantially from those that prevailed when the model was developed. Do you have thoughts on this?

From a TCB point of view, participants agreed that a robust risk management framework is driven internally by the group rather than the PRA. They also acknowledged that risks should be understood at a branch level, including knowing for example the theoretical capital requirements at branch level for pricing purposes.

However, this can be challenging if capital model results cannot be split out at branch levels, even if the model captures UK-specific risks. One participant mentioned that they are able to recalibrate their internal model to look at UK level risks, whilst for another participant the UK level analysis focusses on the liabilities only as market and credit risks are not managed at the branch level.

The use of other financial metrics at a branch level was also discussed. At a group level the reinsurers represented are clearly solvent from a capital point of view, but it helps to look at metrics which consider the viability of the branch as if it was a standalone entity. One such metric is to look at potential losses at a branch level and consider what the payback period is. One participant highlighted that this was particularly important during the pandemic as it helped to understand how long it would take to recover losses during this period.

Last year HM Treasury published its response to the Solvency II consultation and outlined the UK government’s final reform packages. What are your initial thoughts on the proposed changes?

One participant suggested that the direct impact on own their own day-to-day work is likely to be minimal whilst another mentioned that there are some operational changes, such as updating existing models to use two yield curves, that need to be taken into consideration. Another participant mentioned that the impact on reinsurance demand is still unknown until more details emerge.

The possibility that firms must participate in regular stress tests and the PRA being able to publish individual firm results was discussed, because possible tests could include various stresses on firms’ reinsurance arrangements. One participant mentioned that this could lead to more interactions and questions with direct insurers as they require more information. There could also be a potential reputational impact for reinsurers depending on how these test results are interpreted. However, one participant suggested any such tests could highlight that global multiline reinsurers look better when compared to monoline reinsurers.

The PRA has also highlighted in its 2023 priorities that there will be a focus on financial risks arising from climate change. Branches in the UK are to consider this even if no specific requirements currently exist.

Most participants mentioned that climate-related disclosures are completed at a group level, with some input provided from the branch. One participant noted that climate scenarios are included as part of their ORSA submission, and some analysis is completed at the branch level.

It was noted that clients are asking more questions about a firm’s climate-related activities before agreeing to work with a reinsurer. Participants suggested that in future they could foresee a situation where direct writers place more weight on the reinsurer’s activities with respect to climate change when making a final decision within a tender process.

¹ PRA (10 January 2023). Insurance Supervision: 2023 Priorities. Retrieved 24 March 2023 from https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2023/insurance-supervision-2023-priorities.pdf?la=en&hash=9ABF6B8EB633A02308D0D9692374867A3109E8ED.

² PRA (October 2018). The Prudential Regulation Authority’s approach to insurance supervision, p. 12. Retrieved 24 March 2023 from https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/approach/insurance-approach-2018.pdf?la=en&hash=4055BBB0B728E1F9E536AB09D69107D01236C658.

³ Bank of England (20 September 2022). Charlotte Gerken speech: Who’s concentrating? Trends in the life insurance sector and the need for strong reinsurance and investment risk management. Retrieved 24 March 2023 from https://www.bankofengland.co.uk/speech/2022/september/charlotte-gerken-speech-bank-of-america.