The Bank of England, through its Prudential Regulation Authority (PRA), has issued a consultation on how funded reinsurance should be treated under UK insurance capital rules.
The consultation recommends bringing financed reinsurance more in line with the capital treatment of other types of investments held by UK life insurers, with the aim of removing what the Bank of England says are inconsistencies in current regulation.
Funding reinsurance typically involves UK life insurers paying a substantial upfront premium to a reinsurer, usually located outside the UK, in exchange for future payments to help meet long-term policyholder obligations.
Under the Bank of England’s PRA proposals, these arrangements will attract capital requirements to better reflect the risk that the reinsurer may not be able to meet its obligations, particularly where the reinsurer’s credit strength is weaker or the underlying assets are inherently riskier.
The PRA explains that insurers currently hold around 2-4% of capital in annuity liabilities in an average funded reinsurance arrangement, compared with around 11-15% for broadly similar investment exposures. According to PRA estimates, the proposed reforms would increase this proportion to around 10%, closing the gap while still recognizing that funded reinsurance has distinct features.
Sam Woods, deputy governor for prudential supervision at the Bank of England and chief executive of the Prudential Regulation Authority, commented: “Financed reinsurance is growing rapidly and, if not managed properly, has the potential to undermine the resilience of insurers. Today’s proposals aim to remove differences in the regulatory treatment of these transactions, protect pensioners and increase insurers’ incentives to invest directly in the UK economy.”
The Bank of England noted that UK insurers are increasingly using funds reinsurance and bulk purchase annuity transactions, where insurers assume liability for paying pensions previously held by defined benefit schemes. In a financed reinsurance structure, the insurance company transfers a large advance payment to the reinsurer, which invests the assets and provides future payments to the insurance company. The PRA stressed that while reinsurers continued to enter the UK insurance market, some of these investments were not required to meet UK regulatory standards.
The PRA estimates that UK insurers currently have around £40bn of treasury reinsurance exposure, with levels rising rapidly as the bulk annuity market grows. The Bank of England’s 2025 life insurance stress tests indicate that continuing to expand these arrangements could have a significant impact on the solvency of insurers under stress conditions.
The consultation aims to more closely align the treatment of counterparty default risk in funding reinsurance with the treatment of other comparable exposures, focusing on the risk of reinsurer default and insufficient collateral to protect against losses.
The BoE’s Prudential Regulation Authority also expects that the proposals will reduce incentives for insurers to rely on financed reinsurance rather than other forms of capital or investment, which may encourage more direct investment activity, including within the UK economy.
Policyholder protection remains at the heart of the proposals, including protection for pensioners whose benefits have been transferred to insurance arrangements. Eligible policyholders are still protected by the Financial Services Compensation Scheme (FSCS).
The changes do not apply to transactions that have been completed or are close to completion, but will apply to new arrangements from 1 October. The consultation is part of the Bank of England’s wider UK solvency reforms, which aim to simplify regulation while maintaining financial resilience and encouraging productive investment.
The PRA also introduced wider reforms, including a matching adjustment investment accelerator to support investment by insurance companies, changes to construction social rules to encourage common industry growth, “strong and simple” reforms for small businesses and the implementation of Basel 3.1 for larger institutions.
