This requires significant due diligence, and we are seeing insurers seeking more advice from third party specialists such as property valuation experts both for illiquid asset valuation and to calibrate adequate market value haircuts. Alternatively, we have seen deferrals of premiums incorporated in deals giving pension schemes time to dispose of such assets in an orderly fashion[9]. These premium arrangements can be complex and potentially capital intensive due to the increased uncertainty they can create. The PRA welcomes innovations in this market as insurers seek to better support their clients. At the same time, we want insurers to understand the additional risks and uncertainties when accepting premium that includes such assets. Even if firms use external expertise to price or manage these deals, Boards remain accountable for the decisions taken. They need to understand the basis for advice from third parties and to challenge the advice robustly. Straightforward questions need good answers: are these risks within appetite? have the bespoke features of the deal been considered over the full lifetime? how has the inherent uncertainty present been captured within the decision-making process? As noted in our 2023 Supervision Priorities letter[10], we are carrying out a thematic review to assess whether BPA writers’ risk management processes are keeping pace with their growth ambitions and expanding risk appetites.
In practice, given the lumpiness and finite nature of this market, I see strong incentives for insurers to stretch their supply capabilities in the short term, to capture as much of the new business while they can, before leaner years arrive. So, let us move to the main course, and examine three areas where we see this stretch arising in practice. An expansion of risk appetites As deals become larger and increasingly focussed on buy-outs of complete schemes, we observe BPA writers expanding their risk appetite, sometimes outside their current core expertise. Firstly, our supervisory work suggests there is an increased appetite to insure deferred pension scheme members: the younger, not yet retired individuals. They bring several additional risks for insurers  Page 4  including much greater uncertainty in the longevity risk, as assumptions have to be made over a much longer period of time, together with risks stemming from policyholder options, such as cash commutation, flexibility on retirement age and transfers outs[6]. This appetite is supported by reinsurers, who provide both pricing expertise and capital. Secondly, the disruption in the UK gilt market last autumn resulted in some pension schemes being overweight in illiquid assets[7] as gilt values fell significantly, and schemes sought to reduce their leverage under liability driven investment strategies[8]. We see insurers increasingly developing solutions to accept illiquid assets as part of the BPA premium, as pension schemes may be reluctant to dispose of these assets in the open market, potentially at a large discount.