PRA to launch thematic review into BPA risk management disciplines

Written by Adam Cadle

11/01/2023

The PRA is to launch a thematic review this year to seek assurance that associated risk management disciplines are keeping pace with any increase in bulk purchase annuity (BPA) growth ambitions.

In a letter sent to the CEOs of PRA-regulated insurance firms, PRA executive director, insurance supervision, Charlotte Gerken, and director, insurance supervision, Shoib Khan, said “the risk appetite for BPA deals is increasing across a number of life insurance firms”.

In light of the multiple external uncertainties facing insurers, the PRA said “it is important to take proactive steps to assess the adequacy of their risk management and control frameworks”.

“Firms should be able to respond to market and credit risk conditions different from those that prevailed for a long time. Firms need to be prepared for novel risks, changes in risk correlations, and increases in distressed assets. We expect firms to assess their credit and counterparty credit risk management capabilities in light of widening credit spreads, rating downgrades, and defaults.”

The regulator also added that recent events such as the liability-driven investment shock have highlighted gaps in insurers’ liquidity risk frameworks, further reinforcing the importance of sound risk management practices. “We expect insurers to test the resilience of liquidity sources to market dysfunction and to re-evaluate potential liquidity demands created by the use of derivatives for risk management.”

On the issue of Solvency II, the PRA said it will seek to engage constructively with affected firms on the technical details of reforms, in advance of formal consultation. It said it will also engage with the life insurance sector on the extent to which the stress testing framework may need to adapt.

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