Insurers face higher capital for funded reinsurance
The Prudential Regulation Authority (PRA) has proposed new capital requirements for funded reinsurance used by UK life insurers. The consultation aims to end a regulatory inconsistency and bolster resilience in the rapidly growing market.
Rebalancing reinsurance risks
The Prudential Regulation Authority (PRA) proposes to treat funded reinsurance more like other investments held by UK life insurers, addressing a regulatory inconsistency.
Currently, firms hold capital worth 2-4 percent of annuity liabilities for average funded reinsurance, compared to 11-15 percent for similar investments.
The proposals would shift this to around 10 percent, better reflecting counterparty default risks, especially with lower-rated reinsurers or riskier collateral.
Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, stated: "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.
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A growing market, a growing risk
UK life insurers are increasingly using funded reinsurance in the Bulk Purchase Annuity (BPA) market.
This involves paying a large upfront premium to an offshore reinsurer, who then invests these funds.
Crucially, these offshore assets do not need to comply with UK standards, yet the reinsurer gains access to the UK insurance market.
The PRA estimates current funded reinsurance exposure at around £40 billion, a figure rapidly increasing due to BPA market growth and the current regulatory treatment favoring this approach.
The PRA's 2025 life insurance stress test highlighted that continued growth in funded reinsurance could significantly impact insurers' solvency positions.
Protecting pensions, boosting investment
These proposals represent a critical step towards safeguarding the long-term resilience of the UK life insurance sector by addressing a clear regulatory arbitrage.
By re-aligning capital requirements, the PRA not only protects policyholders but also incentivizes more direct investment into the UK economy.
This pragmatic approach ensures market stability while fostering a healthier investment landscape.