PRA considers stronger measures for UK bulk annuity insurers using Funded Reinsurance

On 18 September, the Bank of England,  published a speech from the PRA’s Vicky White (Director, Prudential Policy), that marks a further shift in the regulator’s tone on Funded Reinsurance. Usage of Funded Reinsurance has accelerated in recent years as insurers look to improve buy-in pricing and capacity but still remains relatively modest across the industry.  

In this article I discuss what the PRA has said and at the bottom I provide further details of what Funded Reinsurance is and how widely it is being used. 

What has the PRA said? 

The PRA has been vocal for some time in its concerns about Funded Reinsurance and that, if used inappropriately, it could lead to a build-up in systemic risks in the UK life insurance sector. It has previously highlighted that it would use its powers to intervene if it is not satisfied with the steps insurers are taking to address concerns the PRA raised.   

However, in this speech the PRA goes a step further. Their goal here would seem to be less about asking insurers to improve their risk management and more about challenging “whether the existing Solvency UK framework provides the right framework for these innovative transactions”. They refer to needing to consider whether any “potential regulatory arbitrage” exists which is a phrase they are unlikely to have used lightly and could signal new rules imposing explicit limits on the structures used or requiring insurers to hold more capital. 

So what happens off the back of this speech? In the first instance we’re some way off this leading to actual rules changes to Solvency UK but it does seem that is now the most likely outcome. The speech refers to an “initial diagnosis” and that the PRA will seek to hold round tables in the autumn to consider if changing rules is the right action. Ultimately any rule changes would also require formal consultation which would attract significant input from across the industry.   

What does this mean for DB pension schemes? 

Our key takeaways for schemes who are considering entering into, or already have, a buy-in are: 

• We welcome the PRA’s continued and early focus on an area that is complex and where a lack of disclosure means it is difficult for trustees and sponsors to independently assess the implications for insurer security;
• We think schemes can be reassured to see the PRA being proactive in a key risk area and ensuring the overall safety and soundness in the firms they regulate;
• Lower usage of Funded Reinsurance has the potential to increase pricing and/or reduce capacity for some insurers who have been using it;  however competitive dynamics remain firmly tilted in the favour of schemes and insurer appetite is strong so we think it is unlikely to have much impact other than for the largest transactions; 
• The PRA confirmed that any changes would be forward looking,  not impacting business written before the changes are implemented. This will no doubt be welcomed by the insurers and importantly means that we are unlikely to see any direct impact for schemes seeking transactions in the near term 

What is Funded Reinsurance and how widely is it used? 

Funded Reinsurance can be thought of as the insurer transferring some of the risks through entering into its own buy-in. It involves UK insurers passing the asset and longevity risks to a separate, typically overseas based, reinsurer. The arrangements are generally covered by collateral and have other features to ensure security in the event of a reinsurer default.    

To put the above in context, the overall use of Funded Reinsurance still remains relatively modest across the industry. Our survey of the UK insurance industry suggests that Funded Reinsurance amounts to less than 7% of annuity portfolios in aggregate with around £3bn of Funded Reinsurance completed last year and around half of insurers not currently using Funded Reinsurance (although around 75% of overall buy-in volumes were by insurers that do use Funded Reinsurance, reflecting that it is typically deployed to support larger transactions). 

The next key dates in the diary for UK insurer security are the publication later this year of the results of the industry wide stress tests (LIST 2025) giving further insights into the risk management of UK insurers.  Aggregate results are due to be provided on 17 November 2025, which will include one Funded Reinsurance scenario, with individual insurers results a week later on 24 November 2025. 

If you would like to understand more about the security of the UK insurance market and what it means for your endgame planning then please do get in touch.