On Thursday, the Bank of England issued a warning to insurers not to go overboard in their attempts to win over more business from pension plans anxious to unload risks.
According to Charlotte Gerken, executive director for insurance supervision at the Bank, insurers must exercise care in the face of strong temptation to seize business possibilities.
For firm-defined benefits or final salary, and pension plans life insurers offer bulk purchase annuities (BPA), which are long-term insurance.
Rising interest rates have increased the funding levels of pension plans, making it less expensive to transfer them to an insurer, and according to Gerken, the sector is geared up for record numbers of transfers.
In a speech, Gerken observed, “We observe BPA writers expanding their risk appetite, sometimes outside their current core expertise, as deals become larger and increasingly focused on buy-outs of complete schemes.”
Before the leaner years start, insurers may be inclined to push the limits of their capacities, according to Gerken.
Over the next ten years, pension obligations might total more than 500 billion pounds ($623.70 billion) for UK life insurers, according to her.
The decisions insurers make today will have long-term effects on the performance and development of the overall economy, according to Gerken. “This is a big structural change in the control of long-term investments in the UK.”
After liability-driven investment (LDI) funds employed by pension schemes struggled to find enough liquidity to pay collateral on skyrocketing gilt rates in September of last year, the Bank was forced to purchase UK government bonds.
According to Gerken, insurers will need to use interest rates, cross-currency, and inflation swaps to manage their pension risks, strengthening the sector’s ties to the larger financial system.
Therefore, Gerken added, “Insurers need to understand how they may become greater sources or amplifiers of liquidity risk as they take on these vast sums of assets and liabilities.”
