Truran: BPA market growth brings risks, PRA proposes new rules

The Bulk Purchase Annuity (BPA) market has seen substantial growth, with 'buy-out ready' schemes increasing from below 5% in 2021 to around 45% today.

This surge in demand has led to record transaction volumes, reaching 354 last year, and attracted new capital with thirteen active participants.

However, this competitive environment has driven BPA pricing to historically low levels in 2025.

While favorable for schemes, this intensifies pressure on insurers' margins, raising concerns that they might take on higher risks without adequate compensation or that assumed investment returns may not materialize.

The PRA emphasizes the need for strong risk management and discipline, especially as transactions become more complex.

Insurers' investment strategies have adapted to the changing BPA market, particularly within Matching Adjustment (MA) portfolios.

While sovereign and corporate bonds still comprise about 60% of MA assets, their mix has shifted, with government bonds increasing.

This has led to gilts-based strategies, some involving leverage, to generate returns.

Liquidity risks, especially during market stress, remain a key supervisory focus, leading to new liquidity reporting requirements for large UK insurers by September.

The remaining 40% of MA portfolios consist of illiquid assets, predominantly secured lending against property or infrastructure.

The PRA closely scrutinizes the credit quality and internal rating capabilities for these assets, as highlighted by the LIST 2025 stress test.