Discussing the FundedRe trend for UK life insurers and pensions to source offshore reinsurance for their risks, Vicky White, the Director for Prudential Policy at the Prudential Regulation Authority (PRA) of the Bank of England, has highlighted the UK ILS structure and regulatory regime as one way that patient capital could be sourced and brought onshore to support the life and pensions sector.FundedRe, as it has been termed, has long been an area of focus for the Bank of England, in a similar vein to which offshore pension reinsurance and risk transfer has also been cited as a potential risk, or at least an area requiring additional oversight.There has always been a concern that assets are being delivered offshore, while the risk remains domestically borne.Of course, that’s far from the case in many life and pensions reinsurance and risk transfer arrangements, but the Bank’s real focus has been on funded deals where it feels there could be a solvency related risk for UK companies.

But never before has anyone from the Bank of England proposed that there could be onshore solutions for bringing patient alternative capital with a long-term focus closer to the sources of UK life and pensions risk.While the fact the insurance-linked securities (ILS) structure and regulatory regime has been highlighted could be considered a positive for the ILS sector, given life ILS deals have become less prevalent, with these large funded arrangements backed by giant asset managers having become more in favour over recent years.In a speech at the 30th Annual Bank of America Financials CEO Conference in London, Vicky White of the PRA highlighted that an opportunity exists to look at how to leverage the UK’s insurance-linked securities (ILS) regulations and the iSPV (or insurance special purpose vehicle) to structure solutions that could achieve the same goal for life, pension and annuity players, but bring those transactions home at the same time.

One area of focus in her speech was looking at ways in which alternative long-term capital options could safely support the UK market.“Developing alternative life capital options in a way that preserves protection of policyholders, enables access to cheaper or more patient capital and supports growth, will require more focussed attention,” White explained.Adding, “Therefore, we will separately be discussing with the sector in the near future the topic of facilitating such alternatives.

We are aware that it is not the regulator’s role to force market innovation and propose new solutions.However, we are interested in understanding whether there are regulatory barriers to more capital entering the sector, for the benefit of our primary objectives and the UK economy.And, in line with our secondary competitiveness and growth objective, we can help by putting in place the right frameworks for new developments to happen safely.” She went on to bring up the UK iSPV structure, which has been developed to support insurance-linked securities (ILS) transactions such as catastrophe bonds, or collateralized reinsurance type arrangements.

“One such potential alternative that may have a role to play is the insurance special purpose vehicles (ISPVs) framework.ISPVs are vehicles that offer a legal and regulatory framework through which insurers can tap into capital from outside investors.The attraction to investors is to gain exposure to a specific part of the business of an insurer without taking on all the risks of the firm as an equity shareholder would have to.

ISPVs are also flexible, enabling different approaches to risk sharing, including excess of loss or quota share covers,” White said.Continuing to say that, “For life insurers there may be ways this could be used to provide additional capacity alongside more common longevity reinsurance or to specifically cover components of asset risks on insurance balance sheets.Most importantly it could unlock a different source of patient long-term capital.” She added that, “Historically, ISPVs have not been considered suitable to support annuity-type business, given the prudential and economic challenges for a vehicle with finite capital to provide effective risk transformation for long-term market and credit risks.

These are real concerns that lead us to tread carefully, and our current position is that it is difficult to see how they could be used under our current framework.“However, being aware of these risks and having listened to initial industry feedback in response to our most recent consultation on the ISPV regime, as summarised in the recent Policy Statement PS9/25, we plan to consider whether and how the ISPV framework could be made more accessible to UK life insurers.Recently, the PRA has been working with HMT, culminating in the publication of HMT’s consultation on the Risk Transformation Regulations, which should serve to facilitate greater use of these types of vehicles.

We are aligned in our ambition to reform the functioning of the UK ISPV regulatory regime, while keeping policyholder interests forefront in our minds.” The plan is to consult with industry to identify whether the iSPV or ILS style structures can play a role in bringing in alternative capital to support life risks and reinsurance in the UK.White said that, “The PRA will therefore continue to work with industry and HMT on further reforms and expects to publish a discussion paper on the topic of alternative life capital options which will consider how the ISPV framework (or other structures) could be made accessible to UK life insurers.” Further stating, “Firms may have other structures in mind, and we are very open to suggestions.Any new structure will present new trade-offs.

For example, while they may offer flexibility and access to patient capital, they may also introduce risks related to a more finite funding period or some limitation to the risk transfer.The PRA is keen to investigate these structures further, with a view to identifying opportunities to advance our secondary objectives in a sustainable way – while maintaining our commitment to safety, soundness, and policyholder protection.” All of which shows a positive approach by the regulator, in thinking broadly about how an ILS regulatory regime , could actually apply to another area where the UK government would welcome more activity being transacted at home.Which ticks the agenda boxes for the UK, while also showing that the regulator is becoming increasingly forward-thinking and open to considering whether there are efficient structures that can be used alongside capital markets funding to support the insurance, reinsurance and risk transfer needs of a wider area of the UK’s financial markets.

As ever though, questions remain.Such as whether the UK could ever be as efficient for these types of life and pensions arrangements as an offshore jurisdiction? As well as, whether the large alternative capital providers would be keen or willing to move some of their activities, having already established structures under offshore regulatory regimes that serve their purposes very well? But it does feel like an exploration worth starting with the help of the industry.As, just like with ILS, it would make sense for the UK to be able to domicile such arrangements locally as well, to the benefit of its re/insurers and pensions.

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