PRA dear CRO letter: BPA termination rights

As we reported in our May briefing note, the PRA has identified as an area for concern the use in buy-in policies of termination rights linked to breach of solvency thresholds. On 4 July, the PRA wrote to Chief Risk Officers of life insurance firms writing bulk purchase annuities (BPAs) to share its view of the potential risks arising from the use of solvency-triggered termination rights clauses (“STTRs”), and its assessment of how firms are mitigating the risks involved.

The PRA plans to engage with relevant firms on a case-by-case basis to understand how they intend to respond to the points raised in the letter. In addition, firms are requested to notify their supervisors if they enter into BPA transactions containing STTR clauses after the date of the letter.

A follow-up review is planned for 2026 to assess how market practices for STTR clauses have evolved and how risk management approaches have developed.

The annex to the letter sets out the PRA’s views on potential risks to insurers from the use of STTRs and approaches to management of the risks, including in relation to matching adjustment portfolios.

Risk management considerations

The PRA identifies a number of areas where insurers have taken or should take steps to develop frameworks to mitigate risks associated with the use of STTRs. Key points include:

• firms could seek to limit the potential adverse impact of STTRs on liquidity and asset concentrations by including contractual flexibility over the asset composition of termination payments
• where there are contractual restrictions on the asset composition of termination payments, this should be aligned with the composition of the firm’s underlying asset portfolio
• if possible, cure periods for breach of STTRs should take into account the time needed to execute management actions
• STTR exposure limits and triggers should be set by reference to effective scenario analysis which assumes concurrent termination across a firm’s portfolio of STTR BPA deals, and makes prudent assumptions in relation to the ability to transfer illiquid assets
• where firms have entered into associated funded reinsurance arrangements, they should allow for receipt of “worst case” funded reinsurance collateral in the context of STTR exposure limits
• firms should consider the potential impact of STTRs on their resolution planning
• firms should gain as much assurance as possible in advance that contractual terms can be relied upon to operate as intended
• it is good practice for firms to maintain STTR termination plans covering preparatory actions and implementation in the event of a termination
• firms should consider the potential impact of STTRs on the MA portfolios, including their ability to meet the MA eligibility conditions.

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