Today marks the last day funded reinsurance arrangements can qualify for the old capital treatment. Any deal where risks are not fully transferred to the reinsurer by close of business on September 30 will fall under the Prudential Regulation Authority's (PRA) new, more capital-intensive rules.
The PRA published Consultation Paper CP8/26 on April 29, proposing changes to how UK life insurers calculate the counterparty default adjustment for funded reinsurance under the Solvency UK regime. Firms currently hold capital worth 2% to 4% of the value of annuity liabilities covered by a funded reinsurance arrangement. The PRA estimates the new rules will push that to around 10% for the average deal. By comparison, firms already hold 11% to 15% against similar investments. The gap between those two figures is what the regulator has argued created a systematic incentive to favour funded reinsurance over economically equivalent alternatives.
The change does not apply to existing in-force arrangements. Business fully transferred on or before today is grandfathered. What changes is everything written from October 1 onwards, with full implementation of the new capital rules from July 1, 2027.
Funded reinsurance has become central to the UK bulk purchase annuity (BPA) market, allowing life insurers to cede both longevity and investment risk to offshore reinsurance counterparties rather than retaining assets on their own balance sheets. The PRA estimates current funded reinsurance exposure across UK firms at around £40 billion. Absent regulatory intervention, the PRA projected it would rise to approximately £110 billion over the next decade if the current rate of use persists.
Around 15% of new BPA business has been ceded via funded reinsurance in recent years, according to the PRA. Some BPA providers have ceded as much as 30% of annual premium through these arrangements, as the approach helped insurers compete on pricing and manage capital more efficiently. That dynamic drew growing regulatory scrutiny of funded reinsurance arrangements well before the PRA moved to explicit rules.
The consultation has already had a cooling effect. Both planned and new transactions were put on hold pending PRA guidance after Vicky White's September 2025 speech signalled the existing principles-based approach may be insufficient, according to Skadden's analysis. The PRA has also warned it expects the volume of new arrangements executed before today's deadline to be consistent with firms' existing plans, not a last-minute rush.
Daniel Gill, client partner at risk and analytics consultancy 4most, said the new regime would materially change the economics of funded reinsurance and prompt insurers to reassess how much longevity risk they cede in future BPA transactions.
"One challenge is that firms are making these decisions before the final policy statement has been published," Gill said. "During the consultation, we raised questions around the correlation of counterparty defaults and collateral downgrades, particularly for unrated reinsurers, contractual features which may already be in place to mitigate recapture losses and whether collateralised longevity swaps will fall within scope. Clarity on these points will be important for firms assessing the impact on pricing and capital."
CP8/26 is a consultation paper, not a final policy statement. Firms are currently pricing and structuring decisions around proposals that remain unconfirmed. The policy statement is expected ahead of the July 1, 2027 implementation date.
Gill said the broader question was what the change means for competition in the BPA market. "If funded reinsurance becomes more capital-intensive, some insurers may choose to retain more longevity risk and assets on their own balance sheets," he said. "That could change the economics of future transactions and affect the pricing and capacity available across the market, particularly for insurers that have relied more heavily on funded reinsurance."
The PRA's 2025 life insurance stress test found that aggregate Solvency Capital Requirement coverage for firms recapturing funded reinsurance fell by 10 percentage points at year-end 2024, despite low initial exposures. The regulator cited that result as part of its justification for moving from guidance to explicit capital rules.
