PRA issues warning to life firms over illiquid assets as MA increases to £335bn

Written by Adam Cadle

30/04/2021

The risk management among UK life insurers of illiquid assets is of “particular concern” to the PRA, with latest figures showing MA portfolios have increased since the start of 2018 by 30%, to around £335bn.

At the 18th Conference on Bulk Annuities, PRA executive director for insurance Charlotte Gerken said: “The range of assets that firms hold in their MA portfolios suggests to us that Solvency II is not of itself a barrier to firms investing in a wide range of asset classes. We see everything from covered bonds to infrastructure; and social housing to restructured Equity Release Mortgages (ERMs) backing annuity liabilities. And whilst the majority of exposures are what might be deemed traditional annuity assets, such as gilts and corporate bonds, less liquid exposures as a proportion of the MA portfolios are large and increasing.

“Insurers may be sole or significant investors in specialised lending and will require a commensurate level of expertise to assess, maintain and potentially work-out such assets.”

Gerken added that firms can “expect to be challenged” when investing in asset classes that are new to them.

The regulator has published supervisory expectations in Supervisory Statement 1/20 “Solvency II: Prudent Person Principle” and Supervisory Statement 8/18: “Solvency II: Internal models – modelling of the matching adjustment”. These cover risk management aspects including the consistency of investments with the prudent person principle, the ability to manage the assets – including in stress or in default – and the ability to model the solvency capital requirement appropriately.

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