The Prudential Regulation Authority issued a letter to Chief Risk Officers of UK life insurers active in the bulk purchase annuity (BPA) market setting out the findings of a thematic review on solvency-triggered termination rights clauses (STTRs). The PRA summarises the key balance sheet and operational risks that could arise if STTRs are triggered, assesses current mitigation practices, and signals that most firms need to strengthen how they evidence and manage the full range of risks. Based on information provided by firms, the PRA estimates life insurers’ total exposure to in-force STTRs at around GBP 50 billion, in some cases representing material proportions of firms’ Matching Adjustment portfolios. The letter highlights risks including liquidity strain and forced sales if termination payments require disproportionate transfers of liquid assets or if illiquid assets prove difficult to transfer in stress, increased residual asset concentrations that may challenge exposure limits and the Prudent Person Principle, contractual ambiguity and dispute risk, and operational challenges at a time when firms are already under solvency stress. It also flags potential interactions with Funded Reinsurance collateral and notes insufficient evidence that firms are comprehensively considering STTR impacts in resolution planning. Good practices observed include contractual flexibility over termination portfolios supported by standardised term sheets, appropriate calibration of triggers and cure periods, and maintaining and testing STTR termination plans, but the PRA identifies gaps such as underdeveloped aggregate exposure limits that are not grounded in scenario analysis including concurrent terminations and prudent assumptions on illiquid asset transferability. Firms are also reminded of Matching Adjustment expectations, including that the contribution of a Matching Adjustment portfolio to a termination payment should be limited to assets held in that portfolio for the terminating contract and that including the contract’s Solvency Capital Requirement in cost-neutrality assessments would be appropriate only in exceptional circumstances. Firms are asked to assess the relevance of the PRA’s findings to their business and take remedial actions as appropriate, with the PRA planning to engage on a case-by-case basis through regular supervision. The PRA also plans a follow-up review in 2026 and asks firms to notify their supervisor promptly of each BPA transaction containing an STTR clause entered into from the date of the letter.

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