The Prudential Regulation Authority (PRA) has unveiled proposals that would significantly tighten the capital regime around funded reinsurance, in a move set to reshape how UK life insurance firms back the country's bulk purchase annuity market.
Set out in consultation paper CP8/26, the proposals would overhaul the counterparty default adjustment, or CDA, applied to funded reinsurance under Solvency UK.
The regulator said the current treatment is misaligned with economically similar assets and fails to capture the underlying risks of structures that increasingly anchor the life insurance sector.
Funded reinsurance typically involves collateralized contracts that transfer asset and liability risks from annuity portfolios to a reinsurer, often offshore. About 15% of new bulk annuity business has been ceded this way in recent years, with exposures potentially climbing from £40 billion to £110 billion over the next decade if left unchecked.
The PRA warned that continued growth could trigger a rapid buildup of underestimated risk, with implications for insurer solvency, policyholder protection and broader market stability.
Its 2025 Life Insurance Stress Test indicated that recapturing exposures from a single largest counterparty, covering £12.3 billion in liabilities, would cut SCR coverage ratios by 10 percentage points and reduce industry surplus capital by about £3 billion.
Fitch Ratings has noted that life insurance firms with very strong starting solvency above 200% saw some of the largest declines under the stress test due to greater exposure to bulk annuity business. Applying the 10 percentage point reduction from funded reinsurance recapture across the industry would push some insurers close to a 100% solvency ratio.
Under the proposals, the CDA would equal the fundamental spread for financial corporate bonds matching the credit quality step and maturity of each cashflow.
Firms would start from the reinsurer's insurer financial strength rating, with up to three upward notches available depending on collateral adequacy, the absence of need for collateral transformation and the credit-enhancing nature of collateral.
Where no IFS rating is available, firms would default to CQS 3 less one notch. The PRA estimates capital held against the average existing funded reinsurance transaction would rise to roughly 10% of underlying annuity liabilities, up from 2% to 4%, compared with 11% to 15% for similar direct investments.
The rules would not apply to arrangements where all risks are fully transferred on or before September 30, 2026, with implementation proposed for July 1, 2027. Qualifying intra-group quota share arrangements and short-term Part VII transfer reinsurance would also be exempt.
The PRA projects additional initial capital requirements of about £700 million annually if usage holds steady, against total UK bulk annuity writer own funds of roughly £80 billion. Industry-wide implementation costs are estimated below £500,000 annualized over 10 years.
The regulator said the framework should improve sector resilience, support competition in the bulk annuity market and channel more life insurance assets into UK productive investments rather than offshore reinsurer portfolios, echoing concerns raised by the IAIS, IMF and Bank for International Settlements.
