The Prudential Regulation Authority (PRA) has published a discussion paper setting out its initial thinking on potential changes to the prudential framework that could allow UK life insurers to access alternative third-party capital by transferring defined tranches of risk to capital market investors, including via possible reforms to the Insurance Special Purpose Vehicle framework. The paper is exploratory and does not propose specific policy changes at this stage. The PRA frames the initiative around market feedback that traditional listed equity and debt can be less accessible or attractive for some firms, particularly listed insurers and mutuals, while noting it has not identified a systemic shortfall of capital in the sector. It highlights the scale of the UK life market at more than GBP 2 trillion of assets and rapid growth in bulk purchase annuities, with recent transfer activity of more than GBP 40 billion per year and predictions of more than GBP 500 billion over the coming decade. Possible structures discussed include adaptations of fully funded general insurance ISPVs, banking-style significant risk transfer approaches, joint ventures and potential life reinsurance sidecars. The paper also sets out prudential and supervisory issues to resolve, including how much regulatory credit can be safely granted for risk transfer, funding levels and eligible assets, maturity mismatches, valuation and model risk, governance and control, and system-wide risks such as arbitrage and rapid investor pullback, alongside draft principles such as maintaining capital quality, requiring bounded and time-limited cover, and limiting use with insurer risk retention. Responses are requested by 6 February 2026. The PRA plans further work in 2026, including policy design and a cost-benefit analysis, alongside additional work by His Majesty’s Treasury on the Risk Transformation Regulations.

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