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Understanding insurer counterparty risk

Explore why assessing insurer financial strength is critical and how our approach helps our clients navigate complexity with clarity and confidence.

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With improving funding levels, trustees and sponsors are increasingly looking to secure member benefits through buy-in and buy-out transactions.

However, considering the insurer counterparty risk implications of a transaction and choosing the right insurer requires more than just understanding the headline numbers – it demands a clear view of an insurer’s financial strength, risk profile, and long-term stability. This is because whilst the UK insurance regime offers strong protections to policy holders, it is not intended to be zero failure – trustees and sponsors should understand the risks before they pass significant amounts of assets to an insurer.

Why understanding insurer financial strength matters

The insurance market for pension schemes is dynamic, with new entrants and changing insurer strategies creating both opportunities and risks. Trustees face increasing scrutiny from members, sponsors, and regulators, including the Pensions Regulator’s heightened focus on ensuring robust decision-making.

While the UK insurance regime offers strong protections to policyholders, the financial strength, strategy and risk exposures of insurers in the market vary. Making an informed decision about your insurance counterparty is an essential step in ensuring confidence in what is, likely, the most important decision you will ever make for your scheme.

Key questions trustees and sponsors should consider include:

Solvency

Does the insurer have sufficient capital to withstand risks and operate effectively?

Risk sensitivities

How exposed is your potential counterparty to financial market risk (such as credit risk), insurance risk (such as longevity) or other types of risk (eg. counterparty credit via funded reinsurance)?

Assets

What type of assets is the insurer holding and what risks does this give rise to? Are assets diversified and aligned with the insurer’s liabilities?

Governance

Do they have robust structures to manage risks effectively?

Regulatory safeguards

What protections are in place to ensure member benefits are secure?

Five key questions trustees should ask about insurer financial strength.

Read the blog

Turning insight into action: How we help our clients make informed decisions

Navigating the complexities of buy-in and buy-out transactions requires technical expertise and practical, actionable advice. Our goal is to simplify these complexities and enable trustees and sponsors to make confident decisions at every stage of the journey.

Since inception, we’ve provided insurer financial strength advice on over £15bn of buy-ins across more than 25 separate transactions.

Here’s what this looks like in practice:

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The bigger picture: Why LCP?

In making such big decisions, our clients need a trusted partner who can offer clarity, confidence, and actionable insights. Here’s what sets our insurer financial strength advice apart:

Award-winning expertise

Recognised for delivering excellence in covenant and financial risk advice.

Proven track record

Over c£15bn+ of buy-ins advised across 25+ transactions.

Tailored solutions

Flexible, cost-effective advice designed to address a scheme’s unique situation.

Market knowledge

Deep insights into regulatory frameworks and active engagement with insurers.

Clear advice

Straight forward reports with clear and actionable insights.

By working with us, our clients gain more than just advice – they gain a partner dedicated to helping achieve their scheme’s long-term objectives.

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Get in touch with our experts

As the pension risk transfer market evolves, trustees will face increasing pressure to ensure robust decision-making and secure the best outcomes for their members. We help our clients navigate this complexity with clarity and assurance.

View all our experts
Francesca Bailey

Francesca Bailey

Partner
Tom Gillespie

Tom Gillespie

Senior Consultant
James Silber

James Silber

Partner

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FAQs

Key areas to consider include:

  • Solvency metrics: How does the insurer’s capital buffer compare to industry benchmarks?
  • Risk exposure: What are the key risks in their investment and reinsurance strategies?
  • Ownership model: Does their structure support long-term financial resilience?

The UK regulatory framework offers robust safeguards, including:

  • Capital requirements: Insurers must hold sufficient reserves to meet liabilities under stress scenarios.
  • Close supervision: The PRA closely monitors insurers, with larger insurers receiving tailored supervision based on their risk profile and activities.
  • Governance standards: Insurers are required to maintain robust governance structures and appoint qualified individuals to oversee critical functions.

These protections, while strong, are not intended to create a zero-failure regime. Trustees should still undertake due diligence to understand the specific risks and resilience of their chosen insurer.

The Prudential Regulation Authority (PRA) plays a crucial role in overseeing insurers and ensuring their financial stability. However, our advice adds value to our clients in two key ways:

  • Enhanced understanding: By providing trustees with a deeper understanding of how insurers operate. Each insurer runs a unique business model. Our insurer financial risk reviews help trustees differentiate between these models, particularly in terms of risk exposure, solvency approaches, and capital strategies. This understanding is crucial for informed decision-making.
  • Due diligence expectations: Trustees are placing significant sums of members’ assets - often hundreds of millions of pounds - with an insurer. Members would expect trustees to undertake at least basic due diligence to ensure confidence in their choice. Our advice helps trustees demonstrate that they have taken appropriate steps to evaluate the insurer’s financial position.

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