UK PRA proposes higher reinsurance capital charges

The U.K. Prudential Regulation Authority has proposed higher capital requirements for funded reinsurance used by life insurers, arguing that the current treatment gives those transactions more favorable treatment than similar investment structures. In a consultation paper published on April 29, the PRA said the change would make insurers hold capital that better reflects the risk that a reinsurance counterparty fails, especially where counterparties have lower credit ratings or post riskier collateral. The regulator said funded reinsurance exposure at U.K. firms is about 40 billion pounds and rising quickly. Sam Woods, the PRA’s chief executive, said the proposals are intended to “protect pensioners” and improve incentives for insurers to invest directly in the U.K. economy. ### What is the PRA changing in practice? The April 29 consultation, CP8/26, proposes to align the treatment of counterparty default risk in funded reinsurance more closely with the treatment applied to similar investments held by insurers. The draft rulebook says the counterparty default adjustment for amounts recoverable from funded reinsurance would be set equal to the fundamental spread for financial corporate bonds published by the PRA. (bankofengland.co.uk) For the average existing funded reinsurance transaction, firms currently hold capital worth 2% to 4% of underlying annuity liabilities, compared with 11% to 15% for similar investments, the PRA said. Under the new proposal, that average capital level would move to about 10%, according to the regulator’s estimate. ### What does the PRA mean by funded reinsurance? (bankofengland.co.uk) The PRA defines funded reinsurance as a reinsurance contract under which a firm transfers credit risk or market risk tied to annuity obligations to a reinsurer. In its supervisory material, the regulator describes it as a collateralized quota-share arrangement that can transfer part or all of the asset and liability risks associated with a portfolio of annuities. (bankofengland.co.uk) The Bank of England said many U.K. life insurers in the bulk purchase annuity market increasingly use funded reinsurance, under which the insurer pays a large up-front premium to an offshore reinsurance counterparty, which then invests the money to fund future payments back to the insurer. Those assets do not need to be compatible with U.K. standards, while the offshore reinsurer still gains access to the U.K. insurance market, the Bank said. (bankofengland.co.uk) ### Why does the regulator say the current setup is a problem? The PRA said its concern is that counterparty risks in funded reinsurance may be underestimated because of the risk profile of counterparties, the complexity of the arrangements, and uncertainty over management actions in stress. The regulator also said more systematic use of funded reinsurance as part of a firm’s business model can increase those risks. (bankofengland.co.uk) The PRA’s 2025 life insurance stress test showed the risk could have a meaningful future effect on insurers’ solvency positions if use of funded reinsurance continues to grow, the Bank of England said in its April 29 release. The regulator said the existing treatment “unduly favours” funded reinsurance over similar risks. ### Why are private equity-backed reinsurers part of this debate? (bankofengland.co.uk) The Bank of England said many of the transactions involve offshore reinsurance counterparties, and market discussion around the consultation has focused on the role of asset-intensive reinsurers in annuity markets. That debate has centered on whether life insurers are using funded reinsurance to move assets and liabilities to counterparties that can invest in a broader range of private credit and other less liquid assets. (bankofengland.co.uk) The PRA’s published material does not name private equity firms in the proposal itself. But its explanation of the policy change focuses on lower-rated counterparties, riskier collateral, and the gap between capital held on funded reinsurance and comparable investments. ### What happens next for insurers? Friday, July 31, 2026 is the deadline for responses to CP8/26, according to the consultation paper. (bankofengland.co.uk) The PRA said the proposed implementation date is July 1, 2027, and the new rules would not apply to funded reinsurance arrangements where all risks were fully transferred on or before September 30, 2026. (bankofengland.co.uk)