Roundtable: Life reinsurance – September 2023

A panel of UK life reinsurance professionals joined Milliman in September 2023 for a roundtable discussion on regulation in the UK and other matters of interest. The discussion focused on the implications for the life insurance (and by extension the life reinsurance) industry following the proposed Prudential Regulation Authority (PRA) reforms to Solvency II and the updated Financial Services and Markets Act (FSMA) bill. Participants also shared their considerations on recovery and resolution plans, consumer duty and their experience post-implementation of International Financial Reporting Standard (IFRS) 17.

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

Participants

Eight professionals representing four global life reinsurers that operate in the UK.

Facilitated by Dilesh Patel and John Jenkins of Milliman.

Notes

The PRA has published a consultation paper (CP)¹ on the proposed reforms to Solvency II, which include reforms for insurers operating in the UK as “third-country branches” (TCBs). What are your thoughts on the PRA’s proposals?

All but one of the reinsurers represented at the roundtable had obtained TCB authorisation from the PRA. Overall, participants said they were supportive of the reforms and welcomed the reduction in administrative burden outlined in the consultation paper for TCBs, although some participants recognised that some aspects of the proposals could have been more ambitious.

Participants raised a concern about the ongoing relationship between the PRA and home regulators, highlighting issues around the timing at which information needs to be provided to each of the regulators. For example, the PRA can request legal entity forecasts, which the reinsurers first share with their home supervisors. The participants stressed the importance of aligning the timings of these requests and the need for the requests from the PRA to be based on information available at the time.

Participants discussed that, whilst there is some reduction in overall reporting requirements, there is also a concern that reporting disclosures may increase for pure reinsurance branches. Most of the participants currently have a reporting waiver, so the introduction of National Specific Templates (NSTs) for pure reinsurance branches, as proposed in the consultation paper, would actually increase their reporting requirements. There is however an expectation that these waivers would continue and therefore pure reinsurance branches would not be subject to additional reporting.

Recovery and resolution plans are now a key topic for UK direct insurers. Is this also impacting reinsurers?

Participants discussed the how the PRA is developing its resolution regime and the possibility that the PRA could require resolution plans to be developed on a legal entity basis. It was discussed how this could be a problem for firms due to the confidential nature of the plans as they would include information on making staff redundancies and details on businesses that could be sold as part of recovery and resolution. This is particularly the case for life reinsurers operating in the UK as a branch of a larger EU entity.

From an insurance perspective, “write-down” arrangements have been updated and clarified under FSMA 2023. Has there been any concern with respect to this topic?

The participants interpreted the update to FSMA 2023 as being that only the liabilities of the direct insurer would be written down and not the assets and liabilities related to the reinsurance. From the perspective of a failing insurer, the liabilities would decrease but the reinsurance asset (or liability) would remain the same. Reinsurers understand this approach in the context that the reinsurance premium has already been paid in full—as is the case with property and casualty (P&C) contracts. However, life insurance contracts are typically long-term, and the reinsurance premium is often paid on an ongoing basis. The participants were concerned whether this approach is appropriate for life insurance.

It was also noted that there have been very few life insolvencies in the UK and so there has been a lack of actual evidence of the arrangements related to a life insurance failure.

The PRA now has a secondary objective to facilitate the UK economy’s international competitiveness and growth in the economy. Do you have any views on this?

Participants discussed how some components of the proposed reforms to Solvency II enable the PRA to achieve this competitiveness, especially with respect to how assets are invested. It was noted how encouraging this secondary objective is seen as a way for the UK government to highlight the advantages of leaving the EU.

The general view, however, was that any action by the PRA to achieve this secondary objective will not compromise its first objective of effective regulation of the industry.

Revisiting a topic from the last Roundtable discussion, participants discussed their relationship with the PRA

Participants shared how reinsurers have been approached by the PRA as part of its data collection exercise. It was mentioned that, given the PRA has now taken on about 200 additional firms as part of its authorisation process post-Brexit, the PRA will naturally wish to understand the similarities and differences between these firms.

Some of the information that was requested from all firms included market analysis, historical performance of the UK entity, forecasts and branch exposure. However, some participants felt the questions were quite vague or that information had been provided already to another team within the PRA.

Participants in general had taken a similar approach to responding to the data request, being transparent as possible.

Most companies have started to report on IFRS 17 in 2023 with interim results published. Have there been any challenges?

Operationally, the participants were time-constrained with moving and inputting the relevant values into the system from the process. IFRS 17 has increased the amount of information that needs to be provided by the reinsurers. To cope with this strain, some reinsurers are considering moving aspects of the process to be off the typical reporting cycle.

One participant highlighted that IFRS 17 is starting to be considered in the pricing of products.

It was discussed how companies in general are changing their disclosed equity metrics to reference the IFRS 17 results. Also, the contractual service margin (CSM) is more volatile than expected and the participants are interested in the impact this additional volatility will have on the market. It was mentioned that a lot of attention is being given to the CSM and the reinsurers that have published their results so far are receiving many questions on it.

¹ Bank of England (29 June 2023). CP12/23 – Review of Solvency II: Adapting to the UK Insurance Market. Retrieved 1 November 2023 from https://www.bankofengland.co.uk/prudential-regulation/publication/2023/june/review-of-solvency-ii-adapting-to-the-uk-insurance-market.