The PRA has published a letter to life and general insurers about longevity risk transfers, and the counterparty risks they transfers can generate.  Here’s a key extract:

“An insurer accepting risk from, transferring risk to, or hedging risk with, a single or small number of counterparties (or connected counterparties) may expose itself to … significant levels of counterparty risk … [(Re)]insurers [are required] to have … strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report [on] the risks facing them both now and … in the future… The PRA … expects firms to monitor, manage and mitigate these concentration risks. This includes risks which are covered by the … SCR … as well as those which are not … [H]olding capital under the SCR in relation to counterparty default risk may not be sufficient in and of itself to mitigate this risk …

… the PRA expects to be notified of longevity risk transfer and hedge arrangements and the firm’s proposed approach to risk management well in advance of completing such a transaction. This expectation applies where a firm is buying or selling longevity protection … This will enable [us] to consider whether the risks of the proposed transaction are being appropriately managed and that the transaction has an underpinning rationale that is consistent with good risk management principles”.

Posted by Cooley