The Prudential Regulation Authority (PRA) has raised concerns that ‘competitive pressures’ are creating incentives for insurers in the bulk purchase annuity (BPA) market to weaken pricing discipline or their risk management standards.

In its annual ‘Dear CEO’ letter setting out its priorities for supervising UK insurers in 2026, the PRA highlighted that the pension BPA market remained very competitive, with firms responding to increased demand from sponsors for buyout solutions.

The pressures created by strong competition had led to pricing and risk management concerns from the authority, which urged firms to ensure their internal risk management frameworks were sufficiently robust.

This was especially prudent as pressures increased on pricing as more complex transaction features were considered, the authority said.

“We continue to engage actively with the sector on these market-wide trends, to understand firms’ perspectives on these issues,” the PRA stated.

“In 2026, we will revisit how firms have responded to our Dear CRO letter on solvency-triggered termination rights, to ensure the potential risks of those contract features are recognised and managed appropriately.”

The PRA also noted the growing use of funded reinsurance (FundedRe), stating that while it can provide access to additional capital and asset classes, it also introduced material risks that needed to be managed carefully.

It confirmed the need for future FundedRe policy action, such as the consideration of explicit regulatory restrictions on the amount and structure of FundedRe, or measures to address any underestimation of risk or regulatory arbitrage, following discussions with firms.

The authority said it expected to provide an update on further policy action in the second quarter of 2026.

Looking at investment strategies, the PRA stressed the importance of insurers managing the liquidity risks presented by ‘strategic structured and synthetic investments’, and said it would look to gain further insights of major insurers’ liquidity exposures after the implementation of its liquidity reporting requirements from September 2026.

It also highlighted the importance of firms’ credit risk management practices aligning with evolving investment strategies amid a movement into newer asset classes and geographies, with firms urged to pay particular attention to exposures to private credit assets.

The PRA was continuing to observe additional capital and new investors looking to enter the BPA market and said it was open to a diverse range of business models and ownership structures for life insurers.

Commenting on the letter, LCP principal, Gavin Smith, said: “The PRA sets a high bar for the standards that it expects insurers to follow, and rightly so.

“We welcome their continued focus on ensuring that insurers proactively manage their risks and react to a competitive market environment in a way the that supports life insurer’s long-term safety and soundness.

“For pension schemes who have previously benefited from the attractive pricing we have seen in the market, or that are contemplating doing so, the presence of a strongly regulated market is of considerable value.

“We encourage trustees and scheme sponsors to take note of what the PRA considers priority areas.”

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