On 16 November 2023, the PRA published a consultation paper on funded reinsurance. The PRA has made several proposals to address what it perceived as “significant potential risks” in the funded reinsurance market (and in particular, in relation to the potential for "excessive concentrated exposures to correlated, credit-focused counterparties”). These include proposals that firms should:
- set limits to their exposures to funded reinsurance counterparties;
- have clear collateral policies in place (including particularly in relation to illiquid assets and the recognition of the loss-mitigating effect of collateral);
- formulate and document a recapture plan;
- assess, both where using the standard formula or an internal model, whether the model is appropriately calibrated for the risks to which they are exposed to by funded reinsurance arrangements;
- be able to articulate clearly the appropriateness of their choice of data for setting the probability of default assumptions; and
- assume that assets and liabilities associated with funded reinsurance contracts be recaptured outside of an MA portfolio, unless they are able to clearly demonstrate that such an inclusion would not result in non-compliance with the MA conditions (under both base and stressed scenarios).
Responses to the consultation paper are due by 16 February 2024.