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The proposals would give the Bank of England wide-ranging powers to deal with acute failure scenarios, treating policyholder liabilities as loss-absorbing.

By Victoria Sander and Tim Scott

HM Treasury is proposing a new UK resolution regime for insurers that would appoint the Bank of England as resolution authority with sweeping powers to resolve insurers through transfer or bail-in, and to make resolution plans and assess resolvability in advance. The regime would share many similarities with the Banking Act 2009 (BA09).

FSMA 2023 includes a court procedure for failing insurers to temporarily write-down liabilities, with implications for counterparties.

By Victoria Sander and Tim Scott

The recently passed Financial Services and Markets Act 2023 (FSMA 2023) provides for a new write-down procedure under which failing insurers can apply to court to have their insurance liabilities written down. Write-downs are intended to be temporary (though no period is specified), followed by a subsequent write-up, which is a transfer of the business or application…

The UK government has signalled the importance of introducing a permanent superfund regulatory regime.

By Victoria Sander

After the excitement around Clara-Pensions’ approval as a “superfund”, or pension consolidator, in late 2021, the market generally expected that other pension superfund structures would soon follow suit. Last year’s mini-budget and the ensuing liability-driven investment (LDI) crisis, which triggered intervention by the Bank of England, no doubt weighed negatively on the development of the pension consolidation market, along with an increased focus on investment strategies for pension schemes generally. The expected pipeline of further approvals failed to deliver new participants in a market which was to provide much-needed de-risking capacity alongside the burgeoning and highly successful insurance bulk annuity transfer market.

Hopes were revived by the Chancellor’s Mansion House speech on 10 July 2023, which commented on the fragmentation of the defined benefit (DB) pension scheme landscape in the UK and the importance of introducing a permanent superfund regulatory regime, presenting a key policy direction by the government.

On 10 August 2023, the Pensions Regulator (TPR) announced revised guidelines for pension superfunds. The original guidance, issued in 2020, established an interim regime for superfunds and set out tests for when a pension scheme would be appropriate to transition to a superfund.

This blog post examines the updated pension superfund guidance and provides a high level overview of the key changes.

As the pace of reform increases, we take a look at key developments and the timeline ahead.

Significant progress has been made on the Edinburgh Reforms since they were announced in December 2022, with developments gathering pace before the summer break. Given the breadth and speed of the reforms, now is a good time to take stock of where things stand and what we can expect in the months ahead. In this publication, we highlight some of the key developments and set out expected dates for future progress.

UK regulator continues to raise concerns that current market practices could lead to systemic risk.

By Victoria Sander

The Prudential Regulation Authority (PRA) has issued another communication, the latest of a series related to reinsurance arrangements for the UK life insurance sector. Charlotte Gerken, Bank of England Executive Director, Insurance Supervision and chair of the PRA’s main executive committee, issued a letter on 15 June to Chief Risk Officers (CROs) communicating the PRA’s insights from its recent schematic review of funded reinsurance.

The PRA has identified reinsurance arrangements, which UK annuity providers use extensively, as an area of potential risk, including potential systemic risk due to increasing exposures to a limited number of longevity reinsurance providers to the sector. The latest missive focuses specifically on reinsurance under which the insurer transfers both asset and investment risk as well as the longevity risk to a particular reinsurer — a form of reinsurance increasingly popular for annuity providers writing large amounts of bulk pension annuity business.

Insurance Ordinance amendments would create a risk-based capital regime aligned with international standards.

By Simon Hawkins and Adrian Fong

On 6 April 2023, the Hong Kong government introduced the Insurance (Amendment) Bill 2023 into the Legislative Council to amend the Insurance Ordinance (Cap. 41, Laws of Hong Kong) (IO) and implement a risk-based capital (RBC) regime for insurers in Hong Kong.

Hong Kong long-term and general business insurers are subject to a rule-based capital adequacy regime, meaning that an insurer’s capital adequacy is based on its solvency margin (which is linked to the amount of premium income or level of insurance liabilities). The existing regime does not take into account factors related to the business and risk management practices of an individual insurer, such as the products offered or the investments made. The prescribed rules on asset and liability valuation also lack consistency in certain areas.

The FCA is proposing a disclosure regime for asset managers, life insurers, and pension providers.

By Paul Davies, Nicola Higgs, Victoria Sander, David Berman, Anne Mainwaring, and Charlotte Collins

On 22 June 2021, the FCA published a Consultation Paper (CP21/17) on introducing climate-related financial disclosure rules and guidance for asset managers, life insurers, and FCA-regulated pension providers. The disclosure requirements would be consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

The FCA plans to introduce the disclosure requirements in a new ESG Sourcebook in the FCA Handbook. The regulator anticipates that this Sourcebook will expand over time to include new rules and guidance on other climate-related topics and wider ESG considerations.

Court of Appeal sets out correct approach to transfer of long-term Insurance.

Victoria Sander, Jon Holland, Alex Cox, and Duncan Graves

Latham & Watkins has won an appeal on behalf of Rothesay Life Plc (Rothesay) in an unprecedented challenge to the High Court’s refusal to sanction the transfer of around 370,000 annuity policies in August 2019 (comprising total policyholder liabilities of approximately £11.2 billion) from The Prudential Assurance Company Limited (PAC) to Rothesay.

The Court of Appeal overturned the High Court’s refusal to sanction the scheme in a judgment[1] handed down on 2 December 2020, and set out the correct approach for a court to adopt when dealing with applications to sanction transfers of insurance business under Part VII of the Financial Services and Markets Act 2000 (FSMA).  The case is the first time an application under Part VII FSMA has been considered in detail by the Court of Appeal.

The Court of Appeal held that the judge was “not justified in making an adverse comparison between the financial strength, record and expectations of PAC and Rothesay”; that his reasoning had been based on a misunderstanding of the applicable financial metrics; and that he did not give adequate weight to the views of the independent actuarial expert or the on-going regulatory role of the PRA.  The Court of Appeal also held that, although non-actuarial factors may be relevant to the assessment of some Part VII applications, the subjective choice of provider by policyholders is not a relevant factor to be considered.

The PRA expands its supervisory expectations for firms on managing climate-related financial risk — publishing a Dear CEO guidance letter.

By Nicola Higgs and Anna Lewis-Martinez

On 1 July 2020, the PRA published guidance in the form of a Dear CEO letter to banks, insurers, and other PRA-regulated firms on managing climate-related financial risk. The letter builds on the expectations set out in the PRA’s supervisory statement on enhancing banks’ and insurers’ approaches to managing financial risks from climate change (SS3/19).

FCA announces steps to obtain clarity for insurers and policyholders.

By Victoria Sander, Martin Davies, Oliver Middleton, and Duncan Graves

The Financial Conduct Authority (FCA) announced today, 1 May 2020, that it is taking steps to resolve contractual uncertainty in business interruption (BI) insurance cover in light of COVID-19 and intends to apply urgently for a court declaration regarding the scope of BI policies.

The FCA has identified a sample of the most frequently used policy wording in which there remains uncertainty on coverage, and intends for the High Court to provide an authoritative ruling on the correct approach to interpretation of such policies and whether each policy may provide BI insurance coverage as a result of COVID-19. The FCA believes that decisive action is appropriate given the divergent approaches of insurers to BI coverage and the importance of certainty for insurers and policyholders in knowing whether their policy provides for BI coverage in the current circumstances.