PRA Update on Funded Reinsurance and Capital in the UK's Life Insurance Sector
Introduction and Background
On 18 September 2025, Vicky White, Director of Prudential Policy at the Prudential Regulation Authority (PRA), delivered a speech on the continued PRA focus on the UK Bulk Purchase Annuity (BPA) market. In particular on the use of cross-border asset intensive reinsurance/ Funded Reinsurance (FundedRe) structures as well as a notable potential shift in the PRA’s stance on the use of ILS within the UK life insurance sector.
FundedRe
This speech builds on a series of regulatory developments that began in 2022 where the PRA first raised concerns about the systemic risks posed by FundedRe. Since then, the PRA has continued its engagement through market-wide surveys, thematic reviews, and targeted stress testing—including the inclusion of a FundedRe recapture scenario in the LIST 2025 exercise. These efforts culminated in the July 2024 release of PS13/24 and SS5/24, which introduced a principles-based framework for FundedRe focused on governance and risk management expectations. Firms then assessed and responded to the PRA's expectations on FundedRe in response to the PRA's Dear CRO letter, to demonstrate robust governance over their use of FundedRe.
White’s latest speech signaled the potential for future rule changes over and above the principles-based framework, including the unbundling of FundedRe components and the introduction of explicit regulatory restrictions or limits on their structure and scale. The PRA is now actively considering measures to address what the PRA perceives as risk underestimation and potential regulatory arbitrage embedded in these transactions.
Following this speech, the PRA has held its first Funded Re Roundtable, on 28 September 2025 slides available here, which brought together industry stakeholders to explore the PRA's potential options.
Life ILS
The speech also recognised the need to be open to alternative sources of capital in the UK life insurance industry. We and the industry have for a number of years been engaging with the PRA on the potential use of insurance linked securities ("ILS") within the life insurance sector. However, the PRA has previously stated that it did not consider that was suitable for long term risks.1 The speech heralds a welcome development in that the PRA intends to engage with industry further on how ILS could be used as alternative capital for life insurance including to support BPA liabilities.
The International Context
The PRA's focus in the UK, on FundedRe does not come in isolation. Regulators globally have been keenly aware of the use by life insurers of asset intensive reinsurance ("AIR" such as FundedRe) and the investment by insurers in alternative assets, fueled by the role that private equity and capital play in the insurance sector. The International Association of Insurance Supervisors (IAIS) calls this the structural shift in the life insurance sector (see March 2025 [Draft] Issues Paper on structural shifts in the life insurance sector).
Key drivers the IAIS has identified for the growth of AIR are investment flexibility, reduced capital requirements, appetite for legacy blocks, and jurisdictional differences in reserving and capital rules. These differences can result in “significant differences in reserve valuation and/or capital requirements,” creating incentives for firms to pursue cross-border reinsurance for more favourable capital treatment.
Actions from other jurisdictions also reflect this focus on AIR. As another "cedant jurisdiction" for AIR, the Dutch regulator (DNB) now requires prior consent for asset intensive reinsurance (particularly where assets are held outside of the EU but potentially more broadly). In the meantime, as a "reinsurer jurisdiction" which is an equivalent reinsurance jurisdiction for the EU under Solvency II and the UK, the Bermuda Monetary Authority (BMA) has introduced enhancements to its capital regime for life (re)insurers in December 2024 with potential changes to its capital framework, as well as pre-approval requirements for asset intensive reinsurance.
Cautious Unbundling
The PRA is concerned that the bundled treatment of FundedRe, where both the asset risk as well as the longevity risk transfers across may obscure the true risk profile of the transaction and result in more favourable capital treatment than if the asset and longevity risk were separately transferred and comparing the asset component of a FundedRe to a collateralised loan obligation. They are of the view that offshore asset concentration and misalignment with Solvency UK standards further complicates the picture. This seems to us to give insufficient credence to the creditworthiness (and capital standing) of a regulated reinsurer in a jurisdiction that has been deemed equivalent.
In exploring how an unbundled treatment of Funded Reinsurance might work in practice, participants were asked to reflect on several key issues. These included how to distinguish fixed investment cashflows from variable risk-transfer elements, how valuation of the investment component would differ from that of private debt instruments, and what factors—beyond the reinsurer’s credit rating—should inform a robust asset rating. Participants considered elements such as collateral arrangements, termination clauses, and structural protections. A recurring concern was the disconnect between the price paid for reinsurance and the valuation of the associated asset.
The PRA has acknowledged that firms are facing challenges with traditional capital sources. Public equity capital is perceived as expensive, with high-return expectations and a low tolerance for volatility. Private capital, while a growing source, brings its own risks, including a perceived lack of transparency and potential for conflicts of interest. Debt capital is constrained by leverage limits. This dynamic was said to drive the global trend toward a more "capital-light" business model, which often relies on reinsurance.
Life ILS – A UK Solution
A more positive development is that alongside its concerns around FundedRe, the PRA recognises the need to then explore alternative capital frameworks. White specifically highlighted Insurance Special Purpose Vehicles (ISPVs) as a potential solution; these are the vehicles used for Insurance-Linked Securities (ILS) under the UK's ILS regime. This would mean allowing life insurers to transfer risk to an ISPV which would in turn issue ILS to investors.
This is a structure that the industry has explored with the PRA in the past which picked up when the UK ILS framework came into force. The PRA has previously considered ISPVs unsuitable for supporting annuity-type business, they say due to the prudential and economic challenges of using finite-capital vehicles (ISPVs) to transform long-term market and credit risks (life business).
The ability to use UK ILS vehicles would address the PRA's concerns around the cross-border nature of AIR/ FundedRe given that it would also be regulating the ISPV itself and may allow for more of the underlying assets to continue to be invested in the UK. We note that another alternative may to be encourage solutions offshore in the UK like reinsurance, such that reinsurance structures can focus on the benefits of investment ease and diversification rather than on only leveraging differences in regulatory capital.
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1 White stated "Historically, ISPVs have not been considered suitable to support annuity-type business, given the prudential and economic challenges for a vehicle with finite capital to provide effective risk transformation for long-term market and credit risks.".