1. Introduction

On 29 April 2026, the Prudential Regulation Authority (PRA) published Consultation Paper CP8/26 on funded reinsurance, proposing targeted changes that would increase the capital requirements for UK insurers using these structures. The consultation was released alongside a closely followed speech by the PRA’s Executive Director for Insurance Supervision, Gareth Truran, which also set out the regulator’s broader assessment of growth, innovation and emerging risks in the UK bulk purchase annuity (BPA) market.

CP8/26 follows a series of measures the PRA has taken since 2022 in response to UK insurers’ use of funded reinsurance. The PRA expects the proposed changes to the counterparty default adjustment (CDA) to increase capital required to be held by insurers using funded reinsurance from the average of 2–4% of the underlying annuity liabilities reinsured to around 10%.

The PRA’s intervention reflects increased global scrutiny of cross-border asset‑intensive reinsurance (including funded reinsurance), although the PRA's proposal is not limited to third-country reinsurers. The PRA was among the first regulators to act in 2022, and others—including De Nederlandsche Bank (DNB) and the Japan Financial Services Authority—have since imposed or consulted on enhanced expectations for cedants entering into these transactions. These measures have largely focused on qualitative requirements, such as prior approval, governance and risk management, and contractual protections. The PRA’s existing approach in Supervisory Statement SS5/24 would continue to apply alongside the proposed CDA changes. CP8/26 would add a more explicit quantitative capital requirement alongside those qualitative expectations.

Responses to the consultation are due by 31 July 2026. The PRA proposes to implement the changes from 1 July 2027, applying them to funded reinsurance entered into from 1 October 2026.

2. Summary of CP8/26 Proposals

CDA Changes

CP8/26 proposes changing the calculation of the counterparty default adjustment (CDA) applied to funded reinsurance to better align it to the treatment of default and downgrade risks on directly held assets. The PRA considers the current CDA approach for reinsurance to be relatively high level and principles based, compared with the calculation of the fundamental spread (FS) for similar risks retained in direct investments. Under the proposal, the CDA for funded reinsurance would be set equal to the FS for financial corporate bonds, calibrated by reference to the credit quality step (CQS) and maturity of each funded reinsurance cashflow.

Because there is no established credit rating methodology for funded reinsurance, the PRA proposes basing CQS used in the CDA calculation on the reinsurer’s insurance financial strength (IFS) rating issued by an external credit assessment institution. Where no external IFS rating is available, the PRA proposes applying CQS 3, less one rating notch.

Collateral Notches

The PRA does consider that certain collateral features that are provided for in a funded reinsurance contract justify using a higher CQS than the reinsurers' IFS rating. It is therefore proposed that the CQS may be adjusted upwards by up to three independent notches to reflect credit risk mitigation from collateral, provided the collateral meets the criteria in Chapter 3G8 of the PRA Rulebook (i.e. Article 214 of Solvency II):

1. 100% collateralised – collateral that fully covers the premium at inception and is adjusted only for changes in market conditions and claims experience, and is isolated from the counterparty’s balance sheet;

2. 100% MA eligible collateral – no collateral transformation or rebalancing is required; the collateral is 100% matching adjustment (MA)‑eligible, and any mismatch between the collateral cashflows and the funded reinsurance cashflows does not give rise to material risk; and

3. Credit‑enhancing collateral – the weighted average rating factor of the worst‑case collateral portfolio indicates that the collateral has a higher credit quality than the reinsurer.

The PRA expects to provide further guidance on how to determine the quality of matching and assess the average rating of the collateral portfolio in a new chapter of SS5/24.

CQS governance

The PRA proposes that an insurer’s methodology for assessing the CQS is presented to its governing body. The insurer’s approach to determining the CQS for funded reinsurance arrangements would also need to be documented and approved by a Senior Management Function (SMF) holder, in most cases the CRO.

Defining “funded reinsurance”

CP8/26 proposes the introduction of a formal definition of “funded reinsurance”. The definition captures life insurance reinsurance arrangements that:

• are used to back annuity or capital redemption liabilities; and
• involve a material transfer of asset risk as well as liability risk, resulting in significant reinsurance recoverables on the Solvency UK balance sheet.

Exclusions: intragroup and interim reinsurance

CP8/26 excludes certain intragroup reinsurance and interim reinsurance from the funded reinsurance CDA requirements.

• Intragroup reinsurance – intragroup funded reinsurance is excluded provided that the arrangement does not increase surplus at group level.
• Interim reinsurance – interim reinsurance entered into in connection with a Part VII insurance business transfer is excluded on the basis that it is short-term arrangement.

Timing and savings provision

Implementation is proposed from 1 July 2027. However, the PRA proposes that the new requirements apply only to future transactions, where all risks are not fully transferred on or before 30 September 2026. This is intended to protect insurers already engaged in “in‑flight” funded reinsurance transactions. Given the time these transactions can take, and with feedback due by 31 July 2026, some market participants may consider the 30 September 2026 savings date challenging for transactions currently in progress.

3. How the UK approach compares internationally

International bodies (including the IAIS) and insurance regulators have focused on asset‑intensive reinsurance and broader structural shifts in the life insurance market for a number of years. Since 2022, the PRA has been at the forefront of implementing measures to address its concerns about funded reinsurance.

Most regulators have, to date, adopted an approach broadly aligned with the PRA’s pre‑CP8/26 position, focusing on qualitative measures such as governance, stress testing and reinsurance risk‑management expectations, particularly in the context of cross-border transactions.

For example, the Japan Financial Services Authority (JFSA) published proposed amendments this month aimed at Japanese insurers’ use of asset‑intensive reinsurance (AIR). The proposals would tighten the conditions under which insurers may rely on AIR, taking a substance‑based approach focused on whether the reinsurance delivers genuine risk transfer. The JFSA has indicated it may challenge AIR transactions that do not meet its criteria. The consultation also proposes explicit limits on concentrations and AIR exposure, including on a group‑wide basis.

De Nederlandsche Bank (DNB) has also imposed a prior‑approval requirement for entering into cross-border asset‑intensive arrangements (which it treats as including many longevity reinsurance arrangements).

Introducing a standardised capital charge for funded reinsurance via the CDA marks a shift from the PRA’s previous approach. The PRA has emphasised that its thinking is informed by, and aligned with, work at international bodies such as the IAIS, IMF and FSB. Further convergence between regulators, including through similar capital charges, may follow.

4. Looking Ahead

Market participants will be assessing what the proposals mean for capital calculations, pricing and the extent to which funded reinsurance can continue to be a beneficial tool to release capital and create additional capacity. The PRA’s stated aim is to prevent funded reinsurance usage from increasing, so that it remains a (small) tool within an insurer’s broader risk‑management framework.

From a legal perspective, these changes are likely to result in:

Preference for reinsurers with higher IFS ratings – reinsurers with higher IFS ratings are likely to be advantaged, given how the CQS would be determined.

Collateral structures – while most funded reinsurance transactions already include many of the collateral features that would support notching, there is likely to be increased focus on substitution rights, asset quality and ensuring the collateral is fully matching‑adjustment compliant.

Potential volume limits – although the PRA has moved away from the idea of unbundling funded reinsurance into separate reinsurance and investment components, it has noted that it may still consider introducing volume limits, depending on the outcome of the 2028 life insurance stress test.

Asset swaps and longevity reinsurance – if the CDA changes level the playing field for funded reinsurance, this may create appetite for more split structures, combining an asset‑risk swap to banks with longevity reinsurance to reinsurers.

Alternative capital – alternative capital solutions that provide innovative capital relief may become more prominent. In his speech, Gareth Truran noted that the PRA’s discussion paper on alternative life capital is at an early stage. The PRA and HM Treasury may consider whether a UK alternative life capital regime is needed to provide protections and guardrails tailored to the transfer of UK life insurance risks.