The Prudential Regulation Authority (PRA) has set out proposals that could significantly raise the capital cost of funded reinsurance for bulk purchase annuity (BPA) insurers, tightening the treatment of arrangements commonly used by providers offering buy-ins to UK defined benefit (DB) pension schemes.

Under the changes, which were put out for consultation, typical funded reinsurance structures embedded in insurers’ asset strategies would face materially higher capital requirements for new transactions from October 2026.

The proposals were revealed in a speech by Bank of England executive director of insurance supervision, Gareth Truran, at the Westminster and City Annual Bulk Annuities Conference.

Truran said: “As we have looked at the current regulatory treatment, we have concluded the current approach underestimates the risks involved and unduly favours funded reinsurance structures over other similar exposures. We want to act now to correct this imbalance before it grows to pose more material risks across the sector.

“Our proposals published today (29 April) therefore aim to strengthen the UK’s prudential capital framework to better reflect the economic substance of funded reinsurance transactions, and to address the underestimation of risk and skewed incentives which we think currently exist.”

The PRA estimated the proposals would increase the capital insurers held against liabilities backed by funded reinsurance from around 2-4 per cent of liabilities to around 10 per cent based on the existing arrangements, bringing the treatment more in line with economically similar exposures that did not use funded reinsurance.

Commenting on the news, LCP partner, James Silber, welcomed 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 key 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.

LCP partner, Charlie Finch, added that last year LCP projected that over £350bn of assets would 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,” Finch concluded.

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