BoE cautions insurers over higher life expectancy reinsurance

By Huw Jones

LONDON, Feb 17 (Reuters) - Britain's insurers should not reinsure themselves against people living longer in the belief that it will directly reduce the amount of capital they are required to hold, the Bank of England said on Wednesday.

Life insurers often insure themselves against so-called longevity risk -- the risk of increasing life expectancy resulting in higher than expected pension pay outs.

New EU "Solvency II" rules introduced last month give insurers an extra incentive to mitigate longevity risk by way of reinsurance to lessen capital requirements, said Andrew Bulley, director of life insurance at the BoE's Prudential Regulation Authority.

However, he said such reinsurance policies would be scrutinised to ensure that they are not being used to get around the new capital rules.

"We will be monitoring closely if firms become active in this market consistently and solely for reasons other than seeking genuine risk transfer," Bulley told an industry event.

Insurers may not be holding enough capital even though they have reinsured themselves against longevity risks, Bulley added.

Bulley said the PRA sent a letter to directors of insurers on February 9 saying it expects to be notified of proposed longevity risk transfer and hedge transactions "well in advance of a firm completing such a transaction.

Meanwhile, the "brave new world" promise of harmonised capital requirements across Europe had not yet been perfected, Bulley said.

"It (Other OTC: ITGL - news) was perhaps unrealistic to expect a single big bang reform that imposed, overnight, a complete uniformity of capital adequacy calculation on a patchwork of national regimes," Bulley said.

Large insurers were given approval by the PRA to use models to calculate how much capital to hold.

He said the UK life insurance sector has been adequately capitalised, and he wanted to "dispel any notion" that the PRA wants insurers to hold far more capital than required than the minimum "solvency capital ratio" or SCR under the EU rules.

"In practice, firms have revealed a clear preference to operate some way above their SCR, not least to meet rating requirements and to provide a margin of safety against an inadvertent or unforeseen breach," Bulley added. (Reporting by Huw Jones; Editing by Keith Weir)