UK Solvency II reforms unlikely to impact longevity reinsurance
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The proposed changes to the Solvency II review in the UK are unlikely to have a significant effect on insurers’ longevity reinsurance strategy, according to one ratings agency.
Many UK insurers reinsure significant longevity risk, often in other jurisdictions. One of the goals of the UK regulator was to reduce this offshoring risk by lowering the Solvency II risk margin as part of the review of the EU directive following Brexit.
Speaking this morning, Harish Gohil, head of EMEA insurance at Fitch Ratings, said depending on the actual changes to Solvency II, these are unlikely to have a significant impact on their longevity reinsurance strategy.
He said this was because ceding risk is part of insurers’ risk management and that this will not change because of Solvency II.
“It is not just about capital release. The motivation isn’t driven by regulatory requirements,” he told mallowstreet.
Although the possibility of reduced offshoring should not be ruled out, “the motivation of offshoring isn’t just to do with regulatory requirements, there are broader considerations”, Gohil added.
Life insurer Phoenix reinsures around 50% of longevity risk but its chief financial officer Rakesh Thakrar told analysts during the firm’s half-year result last month that even if the risk margin fell by 70%, the company would continue to reinsure longevity risk “because it’s not quite big enough to make that difference”.
The changes to Solvency II proposed by the UK government include a 60% reduction in the risk margin for life insurers and 30% for general insurers, a reduction in transitional measure on technical provisions, reassessing the fundamental and tightening the matching adjustment.
