The plans – set out in a consultation published today (29 April) – would see funded reinsurance being treated more like other investments that UK life insurers hold, ending what the watchdog said was “a regulatory inconsistency”.

The PRA said that, as a result of the new rules, 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.

It said that, 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.

Jon Stapleton has the ear of the great and good (or a press release)Bank of England deputy governor for prudential regulation and PRA chief executive Sam Woods 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.”

I couldn’t agree more, the insurers shipping our assets across the pond are taking advantage of laxer rules, investing in private credit and creating a problem for the annuities that pay pensioners their money.

Jon goes on, getting pretty close to howling at the moon himself!

The PRA said many UK life insurers in the BPA market are now increasingly using funded reinsurance, in which the UK life insurer pays a large up-front premium to an offshore reinsurance counterparty, who invests this in assets to fund future payments to the insurer. These assets do not need to be compatible with UK standards, while the offshore reinsurer still benefits from access to the UK insurance market.

The PRA estimates 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.

The PRA said 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.

It said the proposals would not apply to business already executed or completing shortly, but would apply to any business from 1 October onwards.

That’s being very kind to insurers in my opinion, if you’re being paid from a buy-in or buy-out of your pension, then your assets will have been on the slow ship with no returning!

Market impact

LCP said it the PRA was proactively focussing on an area it sees as a potential source of risk to insurer resilience, particularly against systemic risks.

Partner James Silber said:

“We expect the proposals to lead to a moderation in the use of funded reinsurance from October given the greater capital insurers will need to hold. Funded reinsurance is likely to remain a key part of the toolkit, potentially with changes to the structures and counterparties, but we also expect to see insurers diversify into alternative asset strategies to optimise pricing.

Partner Charlie Finch added:

“Last year we projected that over £350bn of assets will be transferred from pensions schemes to insurers over the next decade. Funded reinsurance has been a key tool used by insurers to support growth so these proposals have the potential to impact overall market capacity and pricing. However, it is a highly competitive market and the insurers have shown a consistent ability to re-optimise their strategies as circumstances change. Trustees are likely to want to scrutinise these changes when entering into buy-ins.”

This is very kind on insurers, I’d rather quote the PRA which in its consultation says

1.3 The PRA is concerned that continued growth in funded reinsurance exposures could lead to a rapid build-up of underestimated risks. This could impact the safety and soundness of UK insurers and policyholder protection and threaten the stability of the UK insurance industry. As illustrated in the 2025 Life Insurance Stress Test (LIST 2025), the recapture of funded reinsurance arrangements from just a single counterparty could have material adverse impacts on firms’ capital positions, even with the relatively small exposures on the books at YE24.

1.4 The risks associated with funded reinsurance have also been identified by international institutions such as the International Association of Insurance Supervisors (IAIS) and International Monetary Fund (IMF). Insurance regulators in the Netherlands and the US have also recently taken actions focused on insurers’ use of funded reinsurance-like arrangements

I reckon this report of the PRA should be considered a  feature of TAS 300 reports from today going forward; actuaries need not wait till October 1st 2026!