The Prudential Regulation Authority (PRA) has published a consultation paper on funded reinsurance (CP8/26) to address its concern that the acceleration in the use of funded reinsurance by the UK’s pension risk transfer market may pose a systemic threat to the stability of the wider UK insurance market, in the context of a wider supervisory focus on exposures to private credit.

The PRA’s proposals are expected to reduce the regulatory capital benefit UK life insurers secure from future transactions, which may reduce the volume of business ceded to the international reinsurance markets once the measures take effect. The changes may also (by design) impact the competitive dynamics in that market, as transactions with larger, well-capitalised, rated counterparties with higher quality (or more controlled) collateral will be comparatively more attractive to cedants.

What is proposed?

Funded reinsurance (also known as asset intensive reinsurance) has been defined by the PRA as a collateralised reinsurance arrangement under which a life insurer transfers both the liability and asset risks from annuity or capital redemption policies to a reinsurer. The ceding insurer pays a premium in return for the reinsurer assuming the obligation to meet the future long-term payment obligations of the ceding insurer under the reinsured policies. Traditionally, the term “funded re” has been used primarily to describe reinsurance relating to annuity policies, but the PRA has decided that its new rules should also apply to reinsurance backing capital redemption liabilities.

In calculating the value of this reinsurance, insurers are required to take into account the risk of default by the reinsurer. The PRA has announced a proposal to standardise the calculation of this credit default adjustment (CDA), using a prescribed rating methodology, centred on insurer financial strength ratings. The intention is to treat the risks of reinsurer default in a similar way to the risk of a corporate default in relation to a financial corporate bond held directly by a UK life insurer. This is expected to increase the capital charge for funded reinsurance from c. 2-4% of the value of the liability to c. 10%. 

To incentivise stronger contractual protections and higher collateral quality, the PRA proposes to allow credit for transactions where there are effective collateral controls, the level of collateral is adequate, the collateral does not need to be rebalanced or transformed on recapture and/or where the collateral is of higher credit quality than the reinsurance counterparty.

Why is the PRA taking this action?

The PRA’s action reflects a number of linked supervisory concerns:

  • The PRA believes that the regulatory capital treatment of funded reinsurance does not appropriately reflect the underlying risks of the transaction, incentivising insurers to purchase reinsurance instead of investing in assets directly and recognising the associated credit default risk of the investments.  However, firms are still indirectly exposed to those credit risks because they will need to recapture the collateral in default or stressed scenarios.
  • The PRA considers that those credit risks are underestimated. The collateral provided for these transactions is increasing in complexity, with counterparties often operating in offshore jurisdictions that allow greater investment flexibility. This collateral is increasingly concentrated in illiquid and private-credit related assets which are more difficult to manage, accurately value and monitor. These credit exposures may be correlated, and in a stressed scenario result in recapture of lower-quality collateral by insurers, resulting in haircuts or liquidity stresses. The PRA’s thinking here builds upon the Bank of England’s wider policy focus on the risks of private credit to financial stability, including the expansion of developed strategies of private equity groups acquiring life insurers and deploying their balance sheets as a source of funding.
  • The volume of activity in the bulk purchase annuity market, in the PRA’s view, necessitates supervisory action now. According to the PRA, funded reinsurance supports 15% of all new business volume and UK life insurance exposures to funded reinsurance are currently c.£40bn and projected to rise to £110bn over the next decade.  The PRA believes, if unchecked, the acceleration of these trends could lead to systemic risk that could threaten market stability in the event of a downturn. The PRA cites its funded reinsurance stress in the Life Insurance Stress Test (LIST), which led to material adverse impacts despite relatively narrow assumptions, as evidence of this potential for harm. Developments in other markets, where private capital or illiquid assets (often investment grade as a result of securitisations) form a much more significant part of life insurance holdings, may have also spurred the PRA into pre-emptive action before the risk of contagion increases.
  • The regulatory incentives to purchase reinsurance as opposed to investing directly in assets runs contrary to the macroeconomic policy objective of encouraging investment in productive UK assets. There is a perception, not necessarily shared by the market, that offshore reinsurers are less likely to invest in UK assets than the UK life insurers. 

What happens now?

The PRA has requested responses to its consultation by 31 July 2026. Given the PRA, and the Bank of England, have been considering and consulting with the market on policy responses to funded reinsurance for some time, it seems unlikely that there will be any material change to the substance of the proposals following this consultation.   

However, firms may wish to comment on the details of the PRA’s approach to calibrating the CDA, as the PRA has deliberately adopted a simplified, standardised approach (in contrast, for example, to the unbundling of the asset risk and longevity risk, a suggestion floated in 2025, which was considered following feedback to be overly complex). This policy approach may itself produce unintended consequences in the market, whether relating to collateral quality, competitive dynamics given the advantages it gives to rated counterparties or M&A strategies. We expect firms and their actuaries will be looking closely at the detail.

Once implemented, the proposals will apply to funded reinsurance transactions entered into following 30 September 2026 and so will not affect existing or in-flight transactions that are signed before this date. The changes would not apply to intra-group reinsurances or reinsurance arrangements entered into in contemplation of an insurance business transfer under Part VII of the Financial Services and Markets Act 2000.

Firms should also stay alert to any measures that may be taken in other jurisdictions or by international supervisory bodies, particularly if the PRA’s proposals lead to a strategic shift by reinsurers towards other life insurance markets.