UK insurers should approach growing BPA market ‘with moderation’, PRA says

Written by Adam Cadle

02/05/2023

The Prudential Regulation Authority (PRA) has said UK insurers should approach the growing opportunities in the bulk purchase annuity (BPA) market “with moderation”.

Speaking at the 20th annual conference on bulk annuities, PRA executive director for insurance supervision, Charlotte Gerken, said there is “considerable temptation to capture business opportunities” this year within the annuity sector.

“One industry estimate, suggests that the UK life insurance industry could onboard more than £500bn of pension liabilities – and associated assets – over the coming decade,” she stated. “This is a big structural change in the control of long-term investments in the UK, and the decisions that insurers make now will have long term consequences for the performance and development of the broader economy. Taking on new BPA business in volume, over a relatively short period, will also involve significant hedging programmes via interest rate, cross currency and inflation swaps, more complex investment arrangements, and will increase interconnectivity with the wider financial market. Insurers, therefore, need to understand, as they take on these vast sums of assets and liabilities, how they may become greater sources or amplifiers of liquidity risk.

“In this context, insurers need to focus on the feasibility of their own management actions under stress. Our 2022 Life Insurance Stress Test feedback noted that concurrent reactions in stress can reduce the effectiveness of any assumed management actions. Better and more frequent information, improved modelling capabilities and enhanced liquidity management will inform this, but firms cannot fully resolve these uncertainties via these methods. Senior management therefore need to limit their need to rely on trading and rebalancing in stress, as such activities may destabilise financial markets further, which would be to their own detriment.”

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