Funded reinsurance transactions involving UK life insurers will face enhanced regulatory requirements under new proposals unveiled today by the PRA.
Under plans in a consultation published today, funded reinsurance would be treated more like other investments that UK life insurers hold, ending a regulatory inconsistency.
As a result, UK life insurers using funded reinsurance will hold capital which better reflects the risks from the default of their reinsurance counterparty, particularly where the reinsurer has a lower credit rating or where they hold riskier collateral. For the average funded reinsurance, firms currently hold capital worth 2-4% of the value of the annuity liabilities, compared to 11-15% for similar investments. Under today’s proposals, the PRA said it estimates that the capital held for the average funded reinsurance transaction would shift to around 10%, which materially addresses the inconsistency but recognises that there are some differences.
Sam Woods, deputy governor for prudential regulation and CEO of the PRA, said: “Funded reinsurance is growing rapidly and has the potential to undermine the resilience of insurers if not managed properly. Today’s proposals aim to iron out the discrepancy in the regulatory treatment for these deals, to protect pensioners and improve insurers’ incentives to invest directly in the UK economy.”
The PRA estimated that current funded reinsurance exposure of UK firms is around £40bn, but this number is rising quickly, reflecting both BPA market growth and how the current treatment unduly favours funded reinsurance over other similar risks. The PRA’s 2025 life insurance stress test showed this risk could in future have a meaningful impact on life insurers’ solvency positions if the use of funded reinsurance continues to grow.
Today’s proposals, the PRA stated, would more closely align the treatment of counterparty default risk within funded reinsurance with the treatment UK insurers apply to similar investments.
"The proposals should reduce incentives for firms to choose funded reinsurance over other sources of capital, supporting future resilience and also driving more direct investment in its place, including investment in the UK economy. They aim to protect insurance policyholders, including those whose benefits have transferred to insurers through pension scheme transfers. Payments to insurance policyholders remain FSCS protected."
Today’s proposals would not apply to business already executed or completing shortly, but would apply to any business from 1 October onwards.
