On 25 November 2016, the PRA published supervisory statement SS18/16: Solvency II: longevity risk transfers which sets out the PRA’s views on the general issues arising from longevity risk transfers and clarified the PRA’s expectations on UK insurers and reinsurers carrying out these transactions.
An insurer accepting risk from, transferring risk to, or hedging risk with, a single or small number of counterparties or connected counterparties may expose itself to possibly significant levels of counterparty risk. Under Solvency II, insurers and reinsurers are required to have an effective risk management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report on a continuous basis, current and potential future risks.
Accordingly, the PRA expects firms to monitor manage and mitigate such concentration risks. This includes both risks covered by the Solvency Capital Requirement (SCR) and those that are not. In practice, this means that holding capital under the SCR in relation to counterparty default risk may not be sufficient to mitigate the risk; additional measures besides capital may be necessary.
The PRA expects to be notified of longevity risk transfer and hedge arrangements and the firm’s approach to risk management well in advance of the completion of any transaction, regardless of whether the firm is buying or selling longevity protection. This will allow the PRA to gain a fuller picture of the market and understand the potential build-up of risk concentrations as a result of these transactions. Moreover, this will enable supervisors to consider whether the risks of the proposed transaction are being appropriately managed and that the transaction has an underpinning rationale consistent with good risk management principles.