The PPP is powerful as it puts the duty on insurers to really understand the risks they face and their resilience to them – it acts as a guardrail for how firms must invest their assets. For instance, the current Pillar 1 regime within the Solvency II[15] framework focuses heavily on reinsurers’ current credit ratings, solvency positions and probability of default. Whereas the PPP would also consider the reinsurer’s resilience over the whole duration of the exposures, as well as the potential impact from a mass recapture event where large concentrations to a small number of counterparties exist. And the PPP is flexible in that it can accommodate a range of investment strategies, risk management practices, business models and types of risk concentration. In 2019, when I last spoke at this conference, we had found that firms had not been implementing the PPP consistently, so we had just begun our consultation on Supervisory Statement (SS1/20)[16] aimed to address this deficiency. SS1/20 sets out PRA expectations of firms regarding their investment strategy and risk management framework, as well as their exposures to non-traded assets, intragroup loans and participations, and valuation uncertainty. It also reminds firms that the PPP applies to all assets including reinsurance arrangements. Since the publication of SS1/20 we have worked with firms to apply the PPP to address risk concentrations of concern to us.
Through the provision of long-term finance that is naturally enabled by the long-term liabilities taken on, insurers also play a vital role in supporting risk-taking and growth in the real economy. There are two trends within the UK life insurance sector that I’d like to cover today, their benefits but also the risks arising from them: The first trend – in two parts – relates to reinsurance: (a) the continued high level of longevity reinsurance; and (b) the emergence of more complex so-called ‘funded reinsurance’. The second trend concerns the continued growth of untraded or illiquid assets in life insurers’ portfolios. There are good business and risk management arguments for both of these strategies, which can  Page 3  also lead to improved pricing for customers. However, over-indulgence in either – or indeed both – could actually result in concentration risks increasing at individual firm-level and in the system as a whole. I’ll look first at why and how these trends have developed, and then set out what the Prudential Regulation Authority (PRA) expects of insurers’ boards and senior management in relation to their risk management. Longevity reinsurance For firms writing new annuity business, the continued use of longevity reinsurance is one area where concentration risk may arise. The long-term nature of longevity risk – i.e. exposure to the risk that annuitants live longer than expected – makes annuity writing capital-intensive, which has a strong impact on pricing. A longevity reinsurance industry has developed to manage this impact.