The Bank of England, through its Prudential Regulation Authority (PRA), has issued a consultation on changes to how funded reinsurance is treated under UK insurance capital rules.
The consultation proposes bringing funded reinsurance more closely in line with the capital treatment applied to other types of investments held by UK life insurers, with the aim of removing what the Bank of England describes as an inconsistency in current regulation.
Funded reinsurance typically involves a UK life insurer paying a significant upfront premium to a reinsurer, often based outside the UK, in return for future payments that help meet long-term policyholder obligations.
Under the Bank of England’s PRA proposals, these arrangements would attract capital requirements that better reflect the risk that the reinsurer may fail to meet its obligations, especially where the reinsurer has weaker credit strength or where collateral assets are riskier in nature.
The PRA explains that insurers currently hold capital of around 2–4% of annuity liabilities for average funded reinsurance arrangements, compared with roughly 11–15% for broadly similar investment risks. The proposed changes would increase this to about 10%, according to PRA estimates, narrowing the gap while still recognising that funded reinsurance has distinct features.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA at the Bank of England, commented: “Funded reinsurance is growing rapidly and has the potential to undermine the resilience of insurers if not managed properly. Today’s proposals aim to iron out the discrepancy in the regulatory treatment for these deals, to protect pensioners and improve insurers’ incentives to invest directly in the UK economy.”
The Bank of England notes that UK insurers have increasingly used funded reinsurance alongside Bulk Purchase Annuity transactions, where insurers take on responsibility for paying pensions previously held by defined benefit schemes. In funded reinsurance structures, insurers transfer large upfront sums to reinsurers, who invest the assets and provide future payments back to the insurer. The PRA highlights that some of these investments are not required to meet UK regulatory standards, even though reinsurers continue to access the UK insurance market.
The PRA estimates that UK insurers currently have around £40 billion of exposure to funded reinsurance, with levels rising quickly in line with growth in the bulk annuity market. The Bank of England’s 2025 life insurance stress testing exercise suggested that continued expansion of these arrangements could have a significant effect on insurers’ solvency under stressed conditions.
The consultation seeks to align the treatment of counterparty default risk in funded reinsurance more closely with that applied to other comparable exposures, focusing on the risk that a reinsurer defaults and that collateral is insufficient to prevent losses.
The Bank of England’s PRA also expects the proposals to reduce incentives for insurers to rely on funded reinsurance rather than other forms of capital or investment, which could encourage more direct investment activity, including within the UK economy.
Policyholder protection remains central to the proposals, including for pensioners whose benefits have been transferred into insurance arrangements. Eligible policyholders remain protected under the Financial Services Compensation Scheme (FSCS).
The changes would not apply to transactions already completed or nearing completion, but would apply to new arrangements from 1 October onwards. The consultation is part of the Bank of England’s wider Solvency UK reforms, designed to simplify regulation while maintaining financial resilience and encouraging productive investment.
The PRA has also introduced wider reforms including the Matching Adjustment Investment Accelerator to support insurer investment, changes to building society rules to encourage mutual sector growth, and reforms under Strong and Simple for smaller firms alongside Basel 3.1 implementation for larger institutions.
