We have just completed due diligence on a £500m buy-in – an interesting case for a number of reasons, but it also served as an excellent reminder of what trustees should expect from their due diligence provider.
In this case the sponsor was a regulated financial services group so the trustee client was technically savvy and asked pertinent, detailed questions. We worked closely with the insurer to enhance information flow and visibility, and ultimately helped the trustees to understand and get comfortable with the risks involved.
IDD can significantly enhance trustees’ governance for a risk transfer transaction, but it needs to be sufficiently robust. We believe it should cover the following areas:
- Reinsurance: this makes the press fairly frequently and rightly so given it is a key ‘blind spot’ for the current regulatory regime (see our article). Given trustees are likely to have read about this, the IDD should set out the risks and importantly how the insurer manages those risks
- Regulations: in 2023 the accounting regime changed the disclosures materially, while the implementation of Solvency UK (the latest application of the Solvency II methodology) is also bringing in material changes this year – the assessment should consider the implications of these changes on the security provided to members
- Investments: insurers are invested in a number of asset classes in which pension schemes are typically not (lifetime mortgages, private lending, and care homes amongst others) – there needs to be a detailed assessment of those asset classes and how their risks are managed
- Sensitivities: funding positions and solvency coverage are not static – like pension schemes insurers’ funding positions can change if experience differs materially from expectations, so the analysis should highlight the main sensitivities of the balance sheet and their materiality
- Interaction: accounting disclosures are not in a universal format which has become even more relevant as some BPA insurers adopted the new IFRS17 accounting regime for 2023, while others did not – additional information and clarification is often required from the insurer to fully understand its risk management therefore
Trustees should expect more than a summary of information in the public domain (which they could pick up themselves) – they should expect a genuine risk analysis of their chosen insurer and an assessment of how those risks are managed. Otherwise it is unlikely to provide the comfort and protection sought.
For further information, contact:
Richard Hall
rhall@argyllcovenant.com
+44 (0)118 334 5801
+44 (0)7718 543168