What ChatGPT thinks trustees considering risk transfer should do given the Bank of England's/PRA’s recent warnings.
28th April, 2023
The following is an unedited question / response over ChatGPT as of 10:45BST 28 April, 2023 (photoshots available). ChatGPT’s responses are significantly affected by the content contained in the question. We have tried to keep the question as unbiased as possible and you are very welcome to try your own variant. What I did note, that from my (as it turned out) very biased first shot to this variant, ChapGPT pretty much said the same thing.
See the disclaimer below and infer what you will.
I am a trustee and would like some guidance or comment to include in my deliberations.
I am aware that a number of schemes are working towards a life insurer provided buyout, with the support of advisers and are engaging with those insurers.
For a number of them, a transaction date is not too far away. However, there have been two comments from the Bank of England (BoE) which suggest such transactions may contain specific risks which may or may not have been brought to the attention of trustees.
Here are some non-exhaustive facts:
In November 2022, the UK Government made some proposed changes to UK solvency rules (the rules that constrain what an insurer can or cannot do). Industry comment was positive and did not detail any increased policyholder risk. Advisers to trustees were in some cases explicit that trustees did not need to take the changes into their consideration with regards to continuing to finalising a buyout transaction.
On 16 January 2023 the Bank of England (BoE) announced that the November 2022 solvency changes increased policyholder risks. There was no industry comment from trustee advisers following the BoE’s warning.
On 27 April 2023 Charlotte Gerken, executive director for insurance supervision at the BoE at an insurance industry conference called for governance, business and risk management at the insurers to cover for three risk areas: an expansion of risk appetites; a reliance on third party capacity [funded reinsurance]; and greater interconnectivity with the wider financial system. The BoE urged “moderation” in an environment of “considerable temptation”.
There has been no industry comment, but the BoE’s warning was only 24 hours ago.
Given this fact pattern, from a governance perspective, what should trustees do?
As a trustee, it’s important to ensure that the interests of your scheme members are protected and that any risks associated with the buyout transaction are identified and managed. With the recent comments from the Bank of England, it would be prudent to review the advice provided by your advisers and assess the potential risks associated with the buyout in light of the new information.
You may wish to engage with your advisers to understand how the changes to UK solvency rules could impact the buyout transaction and what measures, if any, the insurers are taking to manage the risks. Additionally, it would be worthwhile to understand how the insurers are managing the three risk areas highlighted by the BoE: expansion of risk appetites, reliance on third-party capacity, and greater interconnectivity with the wider financial system.
In making your decision, it’s important to weigh the potential benefits of the buyout against the potential risks, and to ensure that your scheme members’ interests are at the forefront of your decision-making process. It may also be helpful to seek independent expert advice to ensure that all potential risks and considerations have been identified and adequately assessed.
DISCLAIMER: Please note that ChatGPT is an AI language model and its responses are generated based on the information it has been trained on. Given its complete lack of context, its output cannot be classified as more than a possible observation out of many. Very specifically, we do not advocate the use of ChatGPT, unaccompanied or otherwise, for any purpose whatsoever. Any use or interpretation of ChatGPT’s responses is solely at your own risk, and we are not liable for any consequences arising from such use. That being said, we understand that some users may find it interesting to see what ChatGPT’s so-called “opinion” might be, whilst recognising that it will be flawed.