2

Risks associated with longevity risk mitigation measures

2.1

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 possibly significant levels of counterparty risk. Readers are also referred to SS20/16, ‘Solvency II: reinsurance – counterparty default risk’.[3]

2.2

Solvency II introduces specific risk management rules which require insurers and reinsurers to have an effective risk management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report, on a continuous basis, the risks facing them both now and potentially in the future (see Rule 3.1 in the Solvency II Firms – Conditions Governing Business Part of the PRA Rulebook). The PRA accordingly expects firms to monitor, manage and mitigate these concentration risks. This includes risks which are covered by the solvency capital requirement (SCR) as well as those which are not. In practice this means that holding capital under the SCR in relation to counterparty default risk may not be sufficient in and of itself to mitigate this risk – additional measures besides capital may be necessary.

2.3

There are a range of residual risks introduced through the practice of carrying out longevity risk transfers. The PRA expects firms to have a clear articulation of their exposure and tolerance of these risks within a clearly defined risk appetite. An example of such a residual risk to be considered is basis risk, where there may be different terms of the annuity contract and the risk transfer.