Funded reinsurance arrangements (FundedRe) in the UK life insurance sector remain a clear supervisory priority for the Prudential Regulation Authority (PRA) following the publication of its supervisory statement SS5/24 in July 2024.
On 18 September 2025, the PRA published a speech by Vicky White, the Director for Prudential Policy at the PRA, setting out the PRA’s latest thinking. The speech signals a potential significant shift in the PRA’s approach to FundedRe arrangements, which could have a material impact on the capital benefits of these transactions to cedants.
FundedRe as a source of capital
FundedRe refers to reinsurance arrangements where reinsurers receive an upfront premium in return for assuming the pension liabilities insured by that life insurer. Under these arrangements, both asset-related risks and longevity risks are transferred by the cedant to the reinsurer.
The PRA emphasised three factors encouraging the increased use of FundedRe, drawing on a recent consultation by the International Association of Insurance Supervisors:
- Access to additional capital: as the market for bulk purchase annuities continues to expand, demand for capital to support the transfer of liabilities from pension schemes to the insurance market increases. The PRA has acknowledged the benefits of FundedRe as a source of additional capital for this market.
- Indirect access to assets originated by or only available to the reinsurer. The PRA sees limited risk to the use of FundedRe to gain exposure to assets beyond the origination capabilities of the UK life insurance industry. However, the PRA has emphasised the need for risks arising from those assets to be managed in line with regulatory requirements, including the prudent person principle.
- Ability to exploit differences in reserving approaches, capital requirements and investment flexibility between the UK and the jurisdiction of the reinsurer. It is this factor on which the PRA is particularly focused, both in terms of the risks this creates for the cedant (and the wider market) and the incentives it creates for investment outside of the UK as opposed to investment in productive UK assets in line with wider government economic priorities.
Potential for regulatory arbitrage
The PRA considers that this third factor, regulatory arbitrage, may be the result of misaligned incentives for FundedRe transactions compared to transactions with similar economic profiles.
Reinsurers in FundedRe transactions are often offshore and not PRA-regulated. As a result, the invested upfront premium (which is generally then secured in favour of the cedant) does not need to comply with UK prudential requirements. White indicates that the PRA, in practice, is already seeing evidence of this producing large cashflow mismatches, as well as large unhedged currency exposures for certain cedants.
White’s speech indicates that FundedRe arrangements are perceived by the PRA as inherently more risky than a longevity swap, where the contractual arrangement does not involve significant asset transfer from the cedant to the reinsurer. White draws a parallel between the transfer of asset-related risk under FundedRe and a loan arrangement, indicating that they are comparable in economic substance.
White pointed to the example of a UK insurer funding its expected annuity liabilities by repayments from a loan it has made, and managing the remaining risk that pensioners live longer than expected with a longevity swap. However, under Solvency UK the loan would be treated as a riskier asset compared to a reinsurance arrangement, where in a loan arrangement the cedant would be considered to have retained credit risk. The speech confirms that the PRA considers the transfer of asset-related risks in FundedRe transactions to be equivalent to a collateralised loan, which is then bundled with a longevity swap, despite the transaction as a whole being within a reinsurance wrapper.
How might the PRA’s approach change?
The PRA has so far adopted a principles-based approach to supervising FundedRe transactions, having consulted on proposals and published a finalised supervisory statement which sets out its expectations for life insurance firms entering into or holding FundedRe arrangements as cedants. White indicated that whilst the PRA would continue to assess whether firms are meeting these standards, it predicted future volumes of FundedRe and associated consequences on market resilience may push the PRA to take further action. Measures such as explicit regulatory restrictions or limits on the amount and structure of FundedRe are being considered.
However, most notably, the speech expressly confirms that the PRA is considering imposing alternative regulatory treatment of the transfer of the asset-related risks. In particular, this could include the “unbundling” of asset-related risk transfer and the longevity risk. White describes this as the PRA’s key focus. Any such steps would be a material departure from the current regulatory treatment of FundedRe and could have significant capital implications for cedants utilising this form of reinsurance, which could reduce future demand for the product.
Alternative sources of capital for the life insurance industry
White also addressed how the PRA can best support broader innovation to promote sustainable growth in the life insurance sector. It is in this context that the PRA is considering whether insurance special purpose vehicles (ISPVs) could offer an alternative source of long-term capital and risk mitigation, as set out in in its recent Policy Statement PS9/25. However, this will require an innovative approach to succeed. As noted by White, there are “prudential and economic challenges for a vehicle with finite capital to provide effective risk transformation for long-term market and credit risks”.
Next steps
The PRA will be holding roundtables later this autumn in relation to its proposed changes to the regulatory treatment of FundedRe and is keen to explore options with industry stakeholders. If the PRA intends to make changes to its approach to FundedRe, it would then consult publicly on those proposals. Reinsurers and cedants in the bulk purchase annuity market should closely monitor these developments and consider the impact for any ongoing or pipeline transactions.
The PRA also expects to publish a discussion paper on the topic of alternative life capital options which will consider how the ISPV framework (or other structures) could be made accessible to UK life insurers.