The volume of life reinsurance premiums has recently soared,
particularly business ceded from UK long-term insurers. Bermuda has
been well-placed to benefit, but could things be about to
There are several drivers for the recent rise in life
Under European Solvency II, in calculating their technical
provisions for policies, long-term insurers must include a risk
margin for unhedgeable risks such as longevity risk (the risk that
beneficiaries and assureds survive longer than expected).
The calculation of the risk margin is acutely sensitive to
changes in interest rates, something which has been identified by
industry groups, rating agencies and the UK Prudential Regulatory
Authority as of questionable suitability. As has been observed in
the industry press, the decision of the UK electorate that Britain
should leave the European Union has only exacerbated the situation
by bringing in its wake Central Bank reductions in benchmark
interest rates (including negative interest rates in some
The risk margin is reduced to reflect reinsurance of the
policies, where the reinsurance meets the relevant risk mitigation
eligibility requirements of Solvency II. This means that European
long-term insurers, particularly those with annuity exposure (which
includes UK insurers in particular), have more incentive to
Some UK long-term insurers are reported to reinsure 75-90
percent of their longevity risk (Source: Financial Times,
'UK fears that rules harm insurance competition', 7
Solvency II has also induced some European long-term insurers to
withdraw from the bulk annuities market, hitherto an important
market for pension trustees seeking to de-risk their longevity
exposure under defined benefit schemes.
This means that the longevity strain on the trustees of defined
benefit schemes, already severe, has only worsened in the
post-Brexit, low yield era, resulting in an uptick in demand for
techniques, such as pensions buy-outs, buy-ins and longevity swaps,
to transfer longevity risk to external risk takers.
As a jurisdiction with a supervisory system that has (since 24
March 2016) enjoyed a confirmed status as equivalent to Solvency
II, Bermuda has been a notable beneficiary of these
Bermuda is home to a substantial number of commercial insurers
licensed to carry on long-term business, including segregated
accounts companies that have been used in a number of innovative
longevity-related transactions to transform derivative risk into
However, the continued application of the Solvency II risk
margin to UK long-term insurers is uncertain, as the UK begins to
explore the possibilities for change to domestic regulation opened
up by Brexit negotiations. On 13 September 2016, the UK
Parliamentary Treasury Committee agreed on the terms of reference
for an inquiry into Solvency II. The objectives include an
assessment of the impact of Solvency II on the competitiveness of
the UK insurance industry. One of the factors identified in
evidence to the Committee as ripe for change (if change proved to
be consistent with the UK's post-Brexit strategy) is the
Solvency II risk margin calculation. It will be the job of the
Committee to consider the extent to which the risk margin harms the
competitiveness of UK long-term insurers (for example, by inducing
them to cede a disproportionate volume of premium in
One can only speculate about the prospects of the
committee's conclusions leading to regulatory change in the UK.
This will depend on, among other factors, the terms on which the UK
leaves the harmonised insurance regulatory framework of European
Union (if indeed it ever does).
Furthermore, whatever changes to the risk margin calculation
ensue, they will not affect UK pensions trustees (who are not
subject to Solvency II), or trustees and plan sponsors in other
jurisdictions, whose demand for longevity de-risking will continue
un-dinted for so long as the low-yield environment prevails. And,
with or without a change in the calculation of the risk margin,
longevity risk will remain on the agenda for UK long-term insurers
for some time to come.
But it is possible that the recent peak in reinsurance premiums
ceded by UK long-term insurers will be short-lived.
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