The Bank of England has cautioned insurers on over indulging themselves in pension schemes that are willing to offload risks.
In a speech delivered at the 20th annual conference on bulk annuities, Bank of England insurance supervision executive director Charlotte Gerken said that insurers need to be careful amid urge to grab business prospects.
Gerken also said that bulk purchase annuities (BPA) writers should exercise moderation.
She further noted that growing rates of interest have expanded pension schemes’ funding levels, thereby making them less expensive to offload to an insurer. The BPA industry is also making itself ready for significant volume of transfers.
Gerken said: “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.”
Insurers could find it tempting to extend their capabilities in the short term to capture additional business before the arrival of leaner years, according to Gerken.
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She also said that British life insurers could take on over £500bn of pension liabilities and related assets over the upcoming decade.
Gerken added: “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.”
Insurers will be required to hedge their pension risks through interest rate, cross currency and inflation swaps, thereby increasing the industry’s connectivity with the wider financial sector, noted Gerken.
Gerken said: “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.”