Balancing innovation and risk: PRA on funded reinsurance and the rapid evolution of the BPA market

On 18 September, the Bank of England’s Prudential Regulation Authority (PRA) delivered a significant speech on the evolving landscape of the UK life insurance sector. Vicky White, the PRA’s Executive Director of Insurance Supervision, highlighted the rapid growth of Bulk Purchase Annuities (BPA) and the increasing use of Funded Reinsurance (FundedRe). While innovation and new capital are welcomed, the PRA made it clear that this must not come at the expense of sound risk management.

What insurers need to know

Supervisory scrutiny

FundedRe is under close watch. The PRA has raised serious concerns about the use of offshore reinsurers and lighter regulatory regimes, particularly around asset quality, cashflow mismatches, and currency risk. There is also a broader systemic concern: firms may become overly reliant on the structure, increasing exposure across the financial system.

Tougher rules ahead

Regulatory change is very much on the table. The PRA is considering whether to “unbundle” the funding and longevity elements of FundedRe so that capital requirements are more consistent across similar risks. The structure already features in the 2025 stress test, and the PRA has planned a series of industry roundtables to gather input. Any future rules would apply only to new transactions, not those already in place.

Not a ‘free pass’

The PRA made clear it does not intend to ban funded reinsurance. It recognises that the structure can provide a valuable source of long-term capital and help insurers access asset classes that might otherwise be difficult to originate. However, firms are expected to approach it with strong governance and transparency, rather than treating it as an easy option.

Broadening capital options

The speech placed FundedRe within the wider discussion on capital innovation. With traditional debt and equity raising capacity under pressure, the PRA is exploring whether Insurance SPVs and other vehicles could provide a safe and effective alternative for annuity business. A forthcoming discussion paper will continue this debate and look at how the sector might broaden its long-term capital base.

Overall

The PRA encourages growth and innovation, but not at the expense of policyholder protection. Insurers should prepare for increased scrutiny of FundedRe and be ready to adapt. Oversight is tightening, and firms must respond proactively.

Want more guidance?

4most can support with recapture planning, stress testing, and navigating the evolving regulatory landscape. Get in touch if you would like to learn more about how our experienced team of actuaries can support your organisation – info@4-most.co.uk.