In this Q&A with InsuranceERM, RGA's Izzy Bickford discusses the current and future landscape for funded reinsurance – also known as asset-intensive reinsurance – in Europe and around the globe.
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RGA has been one of the prime movers in reinsuring the UK's pension risk transfer insurers. Izzy Bickford, Director of Business Development in the UK, talks with InsuranceERM about the funded reinsurance business and how she sees it developing.
RGA completed its first funded re transaction in the UK in 2014, and other reinsurers transacted solutions prior to this. So, while funded re is not a new product, we have seen development of the offering through the years.
We have seen an increase in appetite from insurers over the last few years, but it makes up a small percentage of reinsurance transactions in the UK – currently around 15-20% of the pension risk transfer (PRT)/bulk purchase annuity (BPA) market.
Using funded re as one of the tools in the insurer's tool kit allows greater access to alternative capital – as well as investment and asset expertise – and provides greater risk transfer. That said, we don't expect funded re use in the UK market to increase much higher than the 20% we note above.
In terms of the underlying liabilities usually seen in funded re transactions, the UK is mainly PRT/BPA business from pension schemes, but there have also been transactions completed on individual annuity backbooks.
The biggest offshore reinsurance hub we see is Bermuda, partly driven by its Solvency II equivalence; however, Barbados and Cayman are also often discussed at industry events.
There is an important distinction, which we believe is often lost when individuals think about offshore reinsurance for funded re; in the vast majority of cases: The assets reside with a custodian in the cedant's home country; therefore, the assets have not moved "offshore" to the reinsurer's jurisdiction.
Offshore reinsurance can have a bad reputation, but if the reinsurer is a well-rated, diversified, and credible partner, and the assets are with a custodian in the insurer's jurisdiction (e.g., the UK/EU) and the treaty terms negotiated adequately mitigate the risk of loss given default, then reinsurance – be it offshore or not – provides additional security for policyholder benefits by providing access to two sources of capital instead of one.
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We see it as part of the landscape, not just in the UK but across the globe, but some cedants and regulators do still have concerns. There is an understandable focus by regulators on the likelihood of correlated counterparty defaults and the importance of diversification.
Under funded re, the ultimate worst-case scenario is the counterparty defaulting. Such risk, while inherent within any reinsurance relationship, has a more pronounced impact here given the reinsurer now owns the assets which future claims will be paid from.
As noted above, there are different levels of offshore reinsurance – the counterparties can vary in credibility, financial strength, and diversification. Insurers and regulators should consider all of these factors when considering the reinsurance counterparty, although we caution against a "one size fits all" approach used by some regulators. But the location of the assets and the quality of the treaty terms are also incredibly important.
In general, we believe open dialogue among all parties involved – cedants, reinsurers, regulators – is incredibly valuable. These structures are complex with significant risk involved, but ultimately there is expertise on all sides that can serve to improve outcomes for policyholders, dispel myths and concerns around funded re, and ultimately help to build robust and secure solutions that will only serve to solidify the long-term reputation of the product line.
Yes, we believe so. If we look at the underlying liabilities in funded re transactions in Asia, there is a mix of underlying products with the more popular being whole of life policies, protection policies, and savings-oriented products such as single premium whole life and fixed annuities. We see no reason why funded re couldn't be used on similar liabilities in the UK.
RGA completed a funded reinsurance deal in Continental Europe in February of this year – a €900 million ($944 million) deal with Baloise. View the press release.
Discussions on funded re are increasing in Continental Europe. Historically consolidation of insurance companies and portfolio transfers have been the go-to route for transferring business and all associated risks, and regulators have been skeptical of asset-intensive reinsurance, but after the Eurovita-Cinven issue in June 2023, we are starting to see more appetite to discuss other solutions.
While most of Continental Europe uses Solvency II as the regulatory framework, each country has independent regulators who interpret regulatory and accounting rules differently. This does cause complications, but EIOPA recently launched a consultation, so we hope that there will be more harmonization after this.
In terms of underlying liabilities, while pockets of PRT business exist, notably in the Netherlands, we see the much greater opportunity in relation to the savings business. Management of these backbooks can be a key concern for clients, whether that be blocks with high historical investment guarantees proving costly, or business with lower guarantees now exposed to lapse risk as interest rates rise. One of the key items to consider in Continental Europe is the profit participation rules linked to the savings products. Some of the regulators are less familiar with the funded re product than others, but we aim to work with both insurers and regulators to have open dialogue on the structure, risks, and rewards.
The Asia market is incredibly interesting – it is similar to Europe in that there is a mix of mature, developed, and developing insurance and reinsurance markets. RGA writes a lot of funded re business in Asia and particularly notable is the Q1 2024 transaction with Japan Post Insurance Company reinsuring an in-force block of individual life annuities. View the press release.
At RGA we have over $90 billion of assets under management handled by a large in-house investment team – much larger numbers in terms of both assets and team members than many clients. So in some markets we find ourselves working with clients who see value in RGA's investment footprint. That said, for valuable assets we can't source or build, we will use external asset managers.
At RGA, we have offered funded reinsurance globally for nearly two decades and in the current economic climate, which has triggered a very active bulk annuity market, we are seeing an increase in bulk annuity providers selectively turning to this proven risk protection cover. We know firsthand that the right arrangement can create a win-win for all involved. Learn how we can create a win for you.
