In a recent speech, Gareth Truran, the executive director of insurance supervision at the UK Prudential Regulation Authority (PRA), set out observations on growth in bulk purchase annuity (BPA) deals. The number of BPA deals is expected to reach all-time highs in 2025, and the aggregate value of these deals may exceed £60 billion by 2027.
Truran’s speech at the 22nd Westminster and City Annual Bulk Annuities Conference at the end of April 2025 also highlighted various PRA reforms — in particular, reforms to the matching adjustment regime. The PRA recently published a consultation paper, CP 7/25, which proposes the introduction of a Matching Adjustment Investment Accelerator (MAIA).
The MAIA framework aims to enable faster and more capital-efficient investments by UK insurance firms in new assets, by removing the requirement for UK insurers to seek PRA’s prior permission before claiming a matching adjustment benefit on certain assets.
Market Conditions
Truran highlighted that recent assessments by the Bank of England’s Financial Policy Committee (FPC) indicate that global risks have increased and economic growth prospects have weakened. The PRA considers that this heightened uncertainty could result in tighter financing conditions, which may exacerbate existing vulnerabilities in private markets, such as high leverage, uncertain valuations, interconnected credit markets and insurers’ exposures.
Truran noted that a significant portion of the assets supporting funded reinsurance transactions originate from private credit and private equity markets, which often carry risks that may be closely linked and not immediately apparent. He also noted that problems in these assets may not be reflected right away in their valuations, defaults or downgrades, particularly when they are pooled or securitised.
Truran went on to say that if these assets do deteriorate, the interconnected risks could cause several funded reinsurance agreements to be unwound at once, raising capital requirements for insurers and forcing them to take actions like rebalancing their portfolios during stressed market conditions.
In light of these risks, the PRA expects life insurers to closely monitor the evolving global risk environment in their risk management and stress testing, with particular attention to their exposure to the underlying assets in funded reinsurance transactions.
The Risks of Funded Reinsurance
In his speech, Truran stated that unlike traditional reinsurance, funded reinsurance often involves counterparties whose business models are more focused on originating private assets rather than on traditional insurance underwriting, which means that the assets backing these transactions are often illiquid and may have a higher default risk.
It is partly because of this that the PRA and the FPC have warned that if the growth of funded reinsurance is not properly managed, it could lead to a rapid accumulation of risk across the insurance sector. Truran noted that commercial drivers to reduce capital strain or secure BPA contracts may lead to higher funded reinsurance volumes or weaken the terms of funded reinsurance transactions.
Truran went on to say that certain firms are not meeting the PRA’s expectation of the limits they have set to manage their funded reinsurance exposures. It is not clear to the PRA that the frameworks firms have in place for managing their funded reinsurance adequately mitigate the potential for a build-up of systemic risk in aggregate. Truran expressed the view that the PRA’s paper (SS)5/24 has to date not altered the outlook for funded reinsurance volumes or prevented a trend, observed by the PRA, toward weaker collateral standards.
The Matching Adjustment
Long-term insurance products like annuities are generally backed by insurers holding long-term assets such as bonds, which are expected to be held to maturity, safeguarding them from market value changes except for issuer default risks. The matching adjustment (MA) is a mechanism that allows (re)insurers to adjust the discount rate applied to future cash flows, using a credit-adjusted rate instead of the risk-free rate, thus reducing the present value of liabilities and their capital requirements. For more on the MA, see Chapter 5 of The Standard Formula: A Guide to Solvency II.
The MAIA Framework
Currently, insurers must apply to the PRA to include specific assets in an MA portfolio to benefit from MA capital treatment. The PRA has a dedicated MA Permissions Team, which can take up to six months to review and approve such applications. In his speech, Truran noted that the average time for an MA application review is just over two months. The development of the MAIA framework aims to shorten the application process, which at present can lead to missed investment opportunities for insurers.
The proposed MAIA framework would allow those insurers that hold MA permission to apply for MAIA permission. If granted, MAIA permission would allow firms to self-assess and include certain assets into their MA portfolio that they consider to be MA-eligible without first requesting a variation to their existing MA permission.
Insurers then have two years to apply to the PRA to formally include these assets in the MA portfolio. In the meantime, they would continue to benefit from the MA capital treatment in the interim period. Once the application is approved, the MAIA assets are integrated into the firm’s MA portfolio and no longer count against the MAIA exposure limit.
In respect of funded reinsurance, the PRA has made clear that firms cannot assume recapture of funded reinsurance assets with new features using an MAIA permission (i.e., assets should only be modeled as recaptured into an MA portfolio where they share the same features as assets for which MA permission has already been granted).
Applying for MAIA Permissions
Insurers applying for MAIA permissions must propose an MAIA exposure limit. The PRA has suggested a general MAIA exposure limit, which is the lower of (a) 5% of the Best Estimate of Liabilities of the MA portfolio (net of reinsurance), or (b) any amount less than £2 billion, as proposed by the insurer.
As part of the MAIA framework, the PRA has proposed requiring any firm that holds MAIA permissions to maintain an MAIA policy. Amongst other things, the policy should outline:
- Any governance or oversight processes in connection with how assets are assessed for inclusion in a firm’s MA portfolio.
- The firm’s intended use of its MAIA permission, which may include a description of assets that would or would not be appropriate for inclusion in the MA portfolio.
- A description of a firm’s MAIA risk appetite framework.
The PRA has also proposed that firms maintain contingency plans for each MAIA asset for circumstances where MAIA assets were determined to not be MA eligible and therefore had to be removed from the MA portfolio.
Reporting Requirements
CP 7/25 also proposes the introduction of an annual “MAIA use” report. The MAIA use report would assist firms in:
- Managing their MAIA permissions.
- Identifying risk management weaknesses.
- Supporting internal operations and governance.
Additionally, the PRA plans to make changes to the Matching Adjustment Asset and Liability Information Return (MALIR) reporting template. This change is necessary in order for the PRA to identify which assets are placed in MA portfolios using MAIA permissions, and to identify when an MA application has not been made on time. The updated reporting template will help the PRA assess the effectiveness of MAIA permissions in achieving its objectives and identifying emerging risks.
Features of the BPA Market
Truran highlighted the strong demand for BPAs from pension scheme sponsors, driven by improved funding positions resulting from higher interest rates. He explained that insurers are currently dealing with tight credit spreads, which influences their investment strategies.
Truran went on to say that the heightened competition in the market has led to changes in BPA contract terms and the introduction of new product features, both of which can create new or different risks for insurers. In light of these developments, the PRA will be closely monitoring the market, as emerging structures and features could threaten insurers’ safety and soundness if not properly managed.
Truran specifically identified solvency triggered termination rights in BPA contracts as a key area of supervisory concern.
Solvency-triggered termination rights allow pension schemes to terminate a buy-in contract if the insurer’s solvency falls below a set threshold. Truran noted that, if exercised, these rights could profoundly impact an insurer’s balance sheet. For example, if a pension scheme terminates the BPA contract, the insurer’s solvency might improve if it keeps the assets backing the solvency capital requirement.
However, if there are restrictions on the types of assets that can be returned to the pension scheme on termination, the insurer may suffer from liquidity problems.
Life Insurance Stress Test
Truran also discussed the PRA’s plan to publish the results of stress tests for the UK’s largest life insurers. The life insurance stress test (LIST) includes three scenarios:
- A core financial market stress test.
- An asset concentration stress test.
- A funded reinsurance recapture scenario.
Truran emphasised that the LISTs are not intended as a pass-fail test or to set regulatory capital but rather, to strengthen market discipline and highlight risk management vulnerabilities.
Publication will occur in two stages:
- Sector-level results and commentary will be released.
- Firm-specific disclosures (which will be composed of some high-level details of the assets held in a firm’s MA portfolio) and some details of how market stress impacts a firm’s solvency position will follow.
In remarks made in response to a question from the floor, Truran stated that one of the purposes of the LIST exercise was to make available, in a careful way, information that would help pension trustees make their own judgments on the strength of their potential counterparty to a BPA transaction.
Importantly, Truran stated that there would be no firm-specific disclosures on the asset concentration stress test or the funded reinsurance recapture scenario.
Next Steps
The PRA plans to implement the proposals in CP 7/25 by Q4 2025, with the exception of changes to MALIR reporting, which will commence on 31 December 2026 to minimize the burden on firms. The consultation period for this paper is expected to last for eight weeks, ending on 4 June 2025.
Furthermore, and with respect to life insurers, the PRA aims to conduct a LIST every two years. The PRA intends to publish the results of the LIST 2025 by the end of the year and plans to reflect on lessons from LIST 2025 before planning future exercises.
For more on the PRA’s approach to funded reinsurance, see our 1 August 2024 client alert “The PRA’s Expectations for Funded Reinsurance: How To Comply.”
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