BOE proposes new rules for funded reinsurance risks

The Prudential Regulation Authority (PRA) has proposed targeted changes to rules for funded reinsurance exposures, aiming to address significant risks and support the UK life insurance market. The consultation closes on July 31, 2026.

Reining in Reinsurance Risks

The Prudential Regulation Authority (PRA) is proposing changes to the calculation of the counterparty default adjustment (CDA) for funded reinsurance under Solvency UK rules.

This aims to align the treatment of funded reinsurance with economically similar assets, better reflecting underlying risks and reducing incentives for excessive use.

The PRA is concerned that continued growth in funded reinsurance exposures could lead to a rapid build-up of underestimated risks, impacting the safety and soundness of UK insurers and policyholder protection.

The 2025 Life Insurance Stress Test (LIST 2025) illustrated that recapturing funded reinsurance from a single counterparty could materially affect firms' capital positions.

The proposed changes would not apply to arrangements where all risks are fully transferred on or before 30 September 2026.

The implementation date for these changes is 1 July 2027.

Growing Appetite, Growing Risks

UK insurers' funded reinsurance exposures have significantly increased in recent years, driven by the growth of the bulk purchase annuity (BPA) market.

Funded reinsurance involves collateralised contracts transferring asset and liability risks from annuities to reinsurers, often offshore.

The PRA considers that the current regulatory treatment does not appropriately reflect underlying risks and is misaligned with economically similar assets, encouraging excessive reliance.

International bodies like the International Association of Insurance Supervisors (IAIS) and International Monetary Fund (IMF) have also identified these risks.

The PRA previously conducted a thematic review (2022-2023) and issued Supervisory Statement (SS) 5/24, setting expectations for firms.

Closing a Regulatory Gap

This consultation represents a crucial step towards addressing a long-standing regulatory arbitrage in the UK insurance market.

By aligning the treatment of funded reinsurance with direct asset holdings, the PRA removes an incentive for excessive risk-taking and strengthens policyholder protection.

The long-term benefits of a more resilient insurance sector clearly outweigh the short-term adjustment burden.