For insurers seeking to reduce risk and optimize capital, funded reinsurance – also known as asset-intensive reinsurance – offers a potential solution. 69É«ÇéƬ’s Danielle Harrington explains.
Discover how 69É«ÇéƬ can help optimize, protect, and monetize your portfolio through asset-Intensive solutions.
This article originally appeared in Rothesay Life's 2024 edition of “– a collection of articles on a wide range of topics relating to the completion of a full buy-out of pension fund liabilities.
As more and more companies look to secure member benefits and remove legacy defined-benefit pension schemes from their balance sheets, the question of how to distribute the built-in risk to give the greatest security for members remains. The security that insurance companies can offer to trustees and members is enhanced by their use of reinsurance. Insurers can focus on the ideal customer and trustee experience, while reinsurers can work to diversify their risk exposure across liabilities and geographies, and hence place themselves as the ideal vehicle for risk protection.
The primary reasons for insurers to use reinsurance are to:
While the industry is familiar with the traditional longevity swap reinsurance protection, insurers are increasingly using complementary funded reinsurance. Use of this risk protection can create a win for all parties involved: the reinsurer, the insurer, the trustee, and the members themselves.
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Funded reinsurance, or asset-intensive reinsurance, of bulk annuity transactions can be explained most simply as a collateralized buy-in between an insurer and a reinsurer. After entering a bulk annuity contract with a pension scheme, the insurer enters a separate reinsurance agreement to cover all, or part, of member benefits. The insurer pays a single premium to the reinsurer, at which point the reinsurer assumes responsibility for the cost of pension benefits, which it pays to the insurer to be distributed to the trustee or the members.
With a longevity swap, the insurer retains the assets and uses these to pay the ‘expected’ benefits and fee to the reinsurer, in exchange for the reinsurer paying the ‘actual’ benefits. Because the expected amounts transferred net off, there is no up-front payment of premium.
With funded reinsurance, the reinsurer essentially takes the payment of the expected benefits from the insurer up front as a fixed premium in return for paying the future reinsurance benefits. The added benefit for the insurer is that funded reinsurance also provides protection against the risk that assets do not perform as well as expected.
It is important to note that funded reinsurance is typically structured so that assets are collateralized and held within the U.K., a priority consideration for both insurers and regulators. With the right reinsurance partner, insurers receive the backing of a well-rated, highly diversified and credible partner – with assets readily available in the unlikely event of a failure of the reinsurer. Meanwhile, regulators can rest assured that investment in U.K. infrastructure and assets will not move offshore.
Insurance companies tend to use funded reinsurance when the bulk annuity market is busy, and when very large transactions come to market. In both scenarios funded reinsurance can help to manage lumpy capital requirements and assist with operational restrictions around asset sourcing. From the reinsurer’s perspective, as a non-correlated risk, asset risk only further diversifies the balance sheet in the case of a multi-line, global, life reinsurer.
For the trustee, the insurer passing on asset risk might be counterintuitive, but the use of funded reinsurance can mean that:
Furthermore, member security improves with a diversified global reinsurer sitting behind the insurance company, which might be much more exposed to volatility within a few geographies or business lines.
At 69É«ÇéƬ, 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.
