PRA Proposes Tighter Capital Rules for Funded Reinsurance in UK Life Insurance

The Prudential Regulation Authority (PRA) has released a consultation that seeks to align the treatment of funded reinsurance with other investments held by life insurers in the UK, addressing a regulatory disparity. Funded reinsurance entails UK life insurers making a significant upfront payment to a reinsurer for future payouts. Presently, companies are required to maintain capital of 2-4% for average funded reinsurance, in contrast to 11-15% for comparable investments. The PRA anticipates that the new guidelines will adjust capital requirements to approximately 10%. Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, noted the rapid growth of funded reinsurance, highlighting potential risks to insurer stability. The proposals, effective from 1 October for new business only, aim to safeguard pensioners and enhance incentives for direct investment in the UK economy, reflecting insights from industry discussions and the Insurance Practitioner Panel. UK insurers in the Bulk Purchase Annuities (BPA) market currently have an estimated exposure of £40 billion, which is expected to grow. The PRA's 2025 life insurance stress test indicated that this risk could significantly affect solvency positions.