The Prudential Regulation Authority (PRA) has set out plans to increase capital requirements for life insurers using funded reinsurance, particularly where reinsurers carry lower credit ratings or hold riskier collateral.
For typical funded reinsurance arrangements, insurers currently hold capital equivalent to around 2–4% of annuity liabilities, compared with 11–15% for broadly similar exposures.
Under the proposals, the PRA estimates this would rise to around 10%, narrowing what it sees as an inconsistency while reflecting structural differences in the products.
The regulator said the change would align the treatment of counterparty default risk in funded reinsurance with that applied to comparable exposures on insurers’ balance sheets.
Counterparty default risk refers to the possibility that a reinsurer fails, and the UK insurer cannot recover sufficient collateral to meet obligations.
In 2025, the PRA carried out its first stress test of the sector’s exposure to reinsurer failure. It concluded that insurers would remain broadly resilient even if they had to “recapture” £12.3bn (€14.2bn) of pension assets, roughly half of what had been transferred to reinsurers.
However, the PRA warned that continued growth in funded reinsurance could pose a greater threat to insurers’ solvency positions over time.
Encouraging direct investment
The proposals are intended to reduce incentives to use funded reinsurance over alternative capital management tools and to encourage more direct investment, including in UK productive assets.
The regulator said the measures are designed to protect policyholders, including pension scheme members whose benefits have already been transferred into bulk annuity arrangements.
Funded reinsurance has become increasingly prevalent in the UK bulk purchase annuity (BPA) market. Under these structures, a UK insurer pays a large upfront premium to an offshore reinsurer, which invests the assets and uses returns to meet future obligations to the insurer.
The PRA noted that these assets are not required to meet UK investment standards, even though offshore reinsurers gain access to UK pension risk transfer flows.
Pension risk transfer records
The wider pension risk transfer (PRT) market reached a record 367 buy-ins in 2025, totalling £38.2bn. While volumes were below the peaks seen in 2023 and 2024, transaction numbers rose 23% year-on-year, and the second half of 2025 marked a record half-year for deal activity.
Full-year volumes are expected to approach £50bn, with several large transactions above £1bn anticipated to complete.
The proposals, subject to consultation, would apply from 1 October and build on the Solvency UK regime, which reduced regulatory constraints on insurers and aimed to support investment in productive assets.
Sam Woods, deputy governor for prudential regulation and chief executive officer 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.”
James Silber, partner at LCP, welcomed the PRA’s “proactive focus” on an area it sees as a potential source of risk to insurer resilience, particularly against systemic risks.
He 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.”
However, Silber said funded reinsurance would likely remain “a key part of the toolkit”, albeit potentially with evolving structures and counterparties, and could prompt insurers to diversify into alternative asset strategies to optimise pricing.
