Executive Summary
- What’s new: The PRA is considering a significant change in its approach to funded reinsurance, including decomposing future transactions into collateralised loans and longevity swaps for solvency capital purposes, and reviewing the ISPV framework.
- Why it matters: These developments are relevant to UK insurers and reinsurers, as the PRA is concerned that its current principles-based approach to Funded Re may be insufficient to address certain systemic risks identified by the agency.
- What to do next: UK insurers should review their pipeline funded reinsurance transactions, monitor upcoming PRA consultations and industry roundtables, and assess the potential impact of prospective regulatory changes on their capital and risk-management strategies.
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Overview
On 18 September 2025, Vicky White, director for prudential policy at the Prudential Regulation Authority (PRA), delivered a speech at the 30th Annual Bank of America Financials CEO Conference. The speech focused on the impact of the growing use of funded reinsurance (Funded Re, also known as asset intensive reinsurance) as a source of capital for insurers in the UK bulk purchase annuities (BPA) market.
The key takeaways from the speech are that the PRA is:
- Forming the view that its principles-based approach to addressing Funded Re by setting supervisory expectations (including those set out in Supervisory Statement SS5/24) may be insufficient to address certain risks associated with Funded Re.
- Considering the decomposition of future Funded Re transactions into a collateralised loan and longevity swap, for solvency capital purposes.
- Examining whether the insurance special purpose vehicle (ISPV) framework might offer a legal and regulatory framework for allowing UK life insurers to raise capital as a partial alternative to Funded Re.
Our view is that:
- The speech will be seen as a vindication of the approach taken by new entrants to the UK BPA market who have sought to acquire UK insurers, or establish newly authorised UK insurers, to underwrite BPA insurance directly, in substitution for a reinsurance strategy.
- This speech will accelerate efforts by UK insurers to execute pipeline Funded Re transactions that have already been discussed with the PRA.
- The PRA’s proposed decomposition of future Funded Re transactions into a collateralised loan and longevity swap, for solvency capital purposes, is likely to be attractive to regulators in other jurisdictions who have raised concerns about Funded Re.
The speech has already proven to be controversial — there are many market participants who are saying that the changes being considered are another example of well-intentioned but disproportionate regulation, the cumulative effect of which frustrates efforts to address weak UK productivity and economic growth. It is also questionable how the PRA will be able to implement the changes from a legal perspective, as they arguably run directly counter to the notion of Solvency II equivalence. In any event, they are likely to be the subject of lively debate over the coming months.
Funded Reinsurance: Growth Drivers and Regulatory Concerns
Vicky White framed her consideration of Funded Re by citing key reasons why life insurers are entering into Funded Re transactions that were identified by the International Association of Insurance Supervisors (IAIS) in its draft Issues Paper on structural shifts in the life insurance sector from earlier this year, namely:
- Access to additional capital: The PRA recognises that Funded Re provides insurers with alternative sources of capital and is supportive of this aspect of Funded Re.
- Access to new asset classes: White acknowledged that Funded Re could facilitate indirect exposure to asset classes not readily available to UK insurers, provided risks such as potential conflicts of interest are effectively managed.
- Regulatory arbitrage: White expressed concern that some UK insurers may be using Funded Re to leverage differences in reserving approaches, capital requirements and investment flexibility between jurisdictions.
Regulatory Arbitrage and Systemic Risk
The fact that White highlighted regulatory arbitrage as a key PRA concern with Funded Re is not particularly surprising. White echoed similar statements made by the International Monetary Fund, the Bank for International Settlements and the UK’s Financial Policy Committee in this regard. The key concern repeatedly highlighted by White was the potential for systemic risk from widespread use of Funded Re as a result of the types of assets forming a substantial part of the collateral backing many Funded Re agreements.
White noted the complexity and an apparent lack of transparency in Funded Re arrangements. In particular, White noted that many of the underlying collateral assets backing Funded Re transactions are private, complex and untraded assets. Therefore, White stated that there is a potential for correlated and concentrated risks that may not be immediately apparent. White said that the PRA has seen examples of large cash-flow mismatches, as well as large unhedged currency exposures in Funded Re transactions, beyond what the PRA has seen in direct investments made by UK insurers. White went on to say that in many of these transactions it looks as if the reinsurer is providing a collateral wrapper that transforms unstructured and “risky” assets into collateral backing a Funded Re agreement.
The PRA’s Shift in Emphasis and Next Steps
White emphasized that the principles-based approach to addressing Funded Re adopted by the PRA setting supervisory expectations (including those set out in Supervisory Statement SS5/24) may be insufficient to address the potential for systemic risks from widespread use of Funded Re. This has led the PRA to consider whether the existing Solvency UK regime provides the right capital treatment for Funded Re transactions.
White goes on to compare the capital treatment under Solvency UK of Funded Re and the capital treatment of a collateralised loan and a longevity swap, two risk-management approaches that White argues are close in economic substance but which are treated differently under Solvency UK from a solvency capital perspective; although this does not take into account the fact that the reinsurer will hold capital to meet its own prudential solvency capital requirements, separately from the collateral pool — so a reinsurance contract is different from a bare contractual entitlement to secured assets in a special purpose vehicle. White points out that Funded Re is essentially a risk-free construct, whereas a collateralised loan attracts capital charges to reflect credit and other risks.
White helpfully provided clarity on how the PRA was proceeding with considering and addressing the risks arising from an increased use of Funded Re. Key points being:
- The PRA is exploring whether the investment component of Funded Re should indeed be “unbundled” from longevity reinsurance for Solvency UK balance sheet purposes.
- Supervisory Statement SS5/24 will continue to set the PRA’s expectations of UK insurers entering into Funded Re agreements. For more on Supervisory Statement SS5/24, see our 1 August 2024 client alert “The PRA’s Expectations for Funded Reinsurance: How To Comply.”
- The PRA is clear that it does not wish to prohibit modest use of Funded Re. The PRA views a proportionate amount of Funded Re as a valuable source of patient, loss-absorbing capital.
- As previously announced, the PRA is including a Funded Re recapture scenario in its 2025 life insurance stress test to better understand the potential impact on the sector.
- Any regulatory changes would apply prospectively, with existing Funded Re transactions grandfathered under current rules.
- The PRA will be holding industry roundtables in autumn 2025 to discuss these issues and will consult on rule changes, if necessary, in line with a normal PRA consultation process.
How Will the PRA Implement Any Change?
It will be interesting to see how the PRA implements any change. While it is not called out as such, a key implied message from the speech (and previous regulatory pronouncements) is that the PRA does not favour Funded Re transactions with Bermudian counterparties. At present, however, Bermuda is an “equivalent” jurisdiction for reinsurance purposes. The original intention of equivalence was that if a reinsurer in an equivalent jurisdiction covers its solvency capital requirement, then an insurer should be free to reinsure risks to it, without penal capital consequences. This is on the basis that “equivalence” is exactly that — a jurisdiction is “equivalent” if it is regarded as being of sufficiently equal strength.
This then poses the question: If the PRA does not believe that Bermuda is truly equivalent, and seeks to address its concern through imposing additional capital requirements on Funded Re, how can it lawfully do that if it runs contrary to the primary notion of equivalence?
There is also the question of whether a blanket capital load on Funded Re transactions is necessarily the right answer from a policy perspective. If a weaker insurer undertakes a Funded Re transaction with a large, well-established, conservatively run, well-rated and diversified reinsurer, that actually provides strong support for the weaker insurer and is good for policyholders.
Added into this mix is the criticism from those who are saying that the changes being considered are another example of well-intentioned but disproportionate regulation, the cumulative effect of which frustrates efforts to address weak UK productivity and economic growth.
All of this makes us wonder how the PRA will implement any change. Perhaps it will not adopt blanket reform, and favour especially onshore Funded Re to large, strong, diversified reinsurers — then penalise weaker reinsurances with capital add-ons or pushing insurers to voluntarily agree to holding additional capital. It will certainly be a challenging question for all concerned.
Alternative Capital and Innovation
The UK insurance special purpose vehicle (ISPV) was designed to unleash onshore alternative capital provision in the UK insurance market. Despite the fact that the regime has now been around for some years, only a handful of ISPVs have been formed. This is largely due to friction in their creation (especially relative to Bermuda) and a perceived lack of regulatory appetite for them. Exemplifying this, in the case of ISPVs for annuity business, White said, “ISPVs have not been considered suitable.”
Nonetheless, White emphasised the PRA’s openness to innovation and alternative sources of patient, long-term capital for the life insurance sector. The PRA is considering whether regulatory barriers exist that impede the entry of such capital. She goes on to say that the PRA is reviewing the potential for ISPVs to play a greater role.
White notes that the PRA expects that the ISPV regime would need to be adapted in order to become an effective option for UK life insurers. She notes the prudential challenges inherent in respect of a vehicle with finite capital providing effective risk transformation for long-term market and credit risks.
The PRA’s emphasis on the role ISPVs might play is welcome, considering the PRA’s recent commentary that it did not expect UK insurers to transfer annuities or risks of similar characteristics to ISPVs, although whether any reforms make any practical difference remains to be seen. For more on the PRA’s proposed reform to the UK ISPV regime, see our 13 August 2025 publication “PRA Announces Reform to the UK Insurance Special Purpose Vehicles Regulatory Framework.”
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.