News release
Under plans in a consultation published today, funded reinsurance – which involves UK life insurers paying a large up-front premium to a reinsurer in return for future payments – would be treated more like other investments that UK life insurers hold, ending a regulatory inconsistency.
As a result, 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.
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. Under today’s proposals, the PRA estimates that the capital held for the average funded reinsurance transaction would shift to around 10%, which materially addresses the inconsistency but recognises that there are some differences.
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.”
In recent years, UK insurers have sold Bulk Purchase Annuities (BPA) to defined benefit pension schemes. Under these transactions the insurer takes over full responsibility for paying members’ regular pensions for as long as needed.
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 £40 billion, 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.
Today’s proposals would more closely align the treatment of counterparty default risk within funded reinsurance with the treatment UK insurers apply to similar investments. Counterparty default risk is the risk that the reinsurer collapses and the UK insurer is unable to recover enough collateral to avoid a loss.
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. They aim to protect insurance policyholders, including those whose benefits have transferred to insurers through pension scheme transfers. Payments to insurance policyholders remain FSCS protected.
Today’s proposals would not apply to business already executed or completing shortly, but would apply to any business from 1 October onwards.
The proposed changes build on the introduction of Solvency UK, which significantly cut red tape for insurance firms and removed barriers to invest in productive assets to support UK economic growth. More widely, recent changes by the PRA to maintain resilience and promote growth, competitiveness and competition in the financial sector include:
- Supporting increased and rapid investment by insurance firms through the Matching Adjustment Investment Accelerator;
- The removal of the Building Societies Sourcebook alongside new measures to support the growth of the mutuals sector;
- And simplifying capital requirements for smaller firms through Strong and Simple, while simultaneously introducing Basel 3.1 for larger firms.
Notes to editors
1. Read the consultation.
2. Read Gareth Truran’s speech from April 2026, which discusses these proposals in detail.
3. Read Vicky White’s speech from September 2025: Funded realignment: balancing innovation and risk.
4. Funded Reinsurance is a form of Asset Intensive Reinsurance.
5. The most recent Life Insurance Stress Test showed the aggregate Solvency Capital Requirement coverage for the firms recapturing funded reinsurance fell by 10 percentage points at year end 2024 despite low initial exposures and some stresses, like currency stress, not being applied.
6. In developing these proposals, the PRA has reflected industry feedback, including discussions held as part of 2025 roundtables with insurers and with the Insurance Practitioner Panel (IPP) in March 2026. The PRA has aimed to establish a simple and pragmatic approach which is straightforward to implement and relies on insurers’ existing capabilities, while still materially addressing the current underestimation of risk and misaligned economic incentives.