The Prudential Regulation Authority has published a consultation paper proposing changes to the Solvency UK treatment of funded reinsurance used by life insurers, aiming to bring the valuation of these arrangements closer to economically similar assets and reduce incentives for excessive use in the bulk purchase annuity market. The package would introduce a rulebook definition of funded reinsurance, revise the counterparty default adjustment applied to these transactions, and update supervisory expectations for firms including Solvency UK insurers, the Society of Lloyd’s and certain UK branches. The main proposal is to require the counterparty default adjustment on funded reinsurance to equal the Solvency UK fundamental spread for financial corporate bonds matching each funded reinsurance cashflow’s credit quality step and maturity. Credit quality would start from an external insurer financial strength rating, with up to three upward notches available for specific collateral features, backed by documentation and Senior Management Function approval. The proposals would apply to new funded reinsurance backing annuity or capital redemption liabilities, with carve-outs for certain intragroup quota share arrangements and temporary Part VII transfer reinsurance. The PRA said about 15% of new BPA business has recently been ceded via funded reinsurance and, absent policy changes, exposures could grow from c. GBP40 billion to c. GBP110 billion over the next decade. It estimates total valuation and capital charges on an average funded reinsurance deal would rise to about 10% of underlying annuity liabilities from 2% to 4% currently. A savings provision would exclude arrangements where all risks are fully transferred to the reinsurer on or before 30 September 2026, with the new calculations proposed to apply from 1 July 2027. Responses are due by 31 July 2026. The PRA said it will monitor the impact of the changes, including through the 2028 life insurance stress test, and may later consult on volume limits if further action is needed.
Prudential Regulation Authority 2026-04-29
UK Prudential Regulation Authority consults on revised Solvency UK funded reinsurance capital treatment with 30 September 2026 savings cut-off
The Prudential Regulation Authority is consulting on changes to the Solvency UK treatment of funded reinsurance used by life insurers, aiming to align valuation with economically similar assets and curb incentives for excessive use in the bulk purchase annuity market. The proposals would define funded reinsurance in the rulebook, link the counterparty default adjustment to the Solvency UK fundamental spread for matching financial corporate bonds, and update supervisory expectations. The PRA estimates total valuation and capital charges on an average funded reinsurance deal would rise to about 10% of underlying annuity liabilities, from 2% to 4% currently, and will monitor impacts via the 2028 life insurance stress test.