Changes to funded reinsurance reflect PRA’s broader focus on resilience of Bulk Annuity market

In a speech today, the Prudential Regulation Authority (PRA) has announced proposed changes to the capital treatment of funded reinsurance used by bulk purchase annuity (BPA) insurers offering buy-ins to UK defined benefit pension schemes. Under the proposals, which remain subject to consultation, typical funded reinsurance arrangements, which form part of many insurers’ asset strategies, will attract much higher capital requirements for new transactions from October 2026.

The PRA estimates the proposals will increase the capital insurers hold against liabilities backed by funded reinsurance from around 2–4% of liabilities to around 10% based on the existing arrangements, bringing the treatment more in line with economically similar exposures that do not use funded reinsurance.

James Silber, LCP Partner, commented: “We welcome the PRA’s proactive focus on an area it sees as a potential source of risk to insurer resilience, particularly against systemic risks.

“We expect the proposals to lead to a moderation in the use of funded reinsurance from October given the greater capital insurers will need to hold. Funded reinsurance is likely to remain a part of the toolkit, potentially with changes to the structures and counterparties, but we also expect to see insurers diversify into alternative asset strategies to optimise pricing.

Charlie Finch, LCP Partner, added “Last year we projected that over £350bn of assets will be transferred from pensions schemes to insurers over the next decade. Funded reinsurance has been a key tool used by insurers to support growth so these proposals have the potential to impact overall market capacity and pricing. However, it is a highly competitive market and the insurers have shown a consistent ability to re-optimise their strategies as circumstances change. Trustees are likely to want to scrutinise these changes when entering into buy-ins.”