Future of UK funded reinsurance in flux as capital charge raised

UK life insurers' continued use of funded reinsurance is hanging in the balance after the country's financial regulator proposed that insurers will have to hold more than double the current level of capital against it.

After concluding earlier in the year that new rules would be needed to prevent excessive use of funded reinsurance, the UK Prudential Regulation Authority (PRA) announced plans on April 29 to push up the capital requirement for the average funded reinsurance transaction to 10% of the value of the underlying annuity liabilities from the current 2% to 4%.

There was "certainly some surprise" at the level of the charge from the audience at a speech detailing the plans by Gareth Truran, the PRA's executive director of insurance supervision, according to Michael Abramson, partner and risk transfer specialist at consulting firm Hymans Robertson LLP. Abramson had expected a doubling at most.

"It's too soon to tell whether the quantum of additional capital is such that actually the appetite for funded reinsurance really just falls away. I think that's a possibility," Abramson told S&P Global Market Intelligence.

Lower use

Funded reinsurance, also known as asset-intensive reinsurance, allows insurers to transfer asset and liability risks from annuity business to a reinsurer, often based in an offshore financial center such as Bermuda. In the UK it is used mainly by life insurers active in the country's pension risk transfer (PRT) market to boost their capacity to do deals, price more keenly, and give them exposure to assets they would otherwise struggle to obtain. About 15% of new PRT business, known in the UK as bulk purchase annuity business, has been ceded to reinsurers through funded reinsurance in recent years, according to the PRA.

The product combines longevity reinsurance with a funding element, where a reinsurer invests in a pool of assets and uses the proceeds to pay its obligations to the insurer. The PRA is concerned that the funding part of the arrangement receives an overly lenient capital charge under the UK's insurance solvency regime, which it says undervalues the risks associated with funded reinsurance and incentivizes over-use.

Despite the 'surprise' nature of the regulator's move, the new charge is not high enough to stop funded reinsurance altogether. "I don't think it goes as far as no funded reinsurance going forward," Gavin Smith, a principal in the pensions actuarial and risk transfer teams at consulting Lane Clark & Peacock LLP, said in an interview. "[But] it's definitely a material change...[and] it will definitely change insurers' behavior and their use of funded reinsurance going forward," Smith said.

Funded reinsurance use varies widely among companies. Legal & General Group PLC, the biggest UK PRT writer in 2025 by deal value according to Hymans Robertson figures, ceded £2.2 billion, or 18.6%, of its £11.8 billion of global pension risk transfer business to funded reinsurers in 2025. £10.4 billion of the total is UK PRT business. By contrast, Rothesay Life PLC, the third biggest UK PRT writer in 2025, uses no funded reinsurance. Usage by individual companies can also vary widely from year to year. Legal & General ceded 4.9% of its global PRT business to funded reinsurers in 2024, but 23.4% in 2023.

A range of reinsurers provide funded reinsurance to UK PRT writers. Bermuda-based Resolution Life Group Holdings Ltd., through its Resolution Re subsidiary, announced its third funded reinsurance transaction for a UK PRT company in October 2024, having made its debut in UK PRT a year before. More recently, InEvo Re Ltd., a Bermuda-based reinsurer ultimately owned by Macquarie Group Ltd., announced its second UK funded reinsurance transaction in December 2025, following its inaugural deal in March of the same year.

While the PRA does not think UK life insurers' current levels of funded reinsurance use pose a problem, it said in the consultation document that if left unchecked, UK insurers' exposure to funded reinsurance could increase to £110 billion from the current £40 billion over the next 10 years if the current 15% cession persists.

The PRA's plan envisages imposing the change through the counterparty default adjustment (CDA), a calculation that adjusts the amount an insurer expects to recover from a reinsurer to account for losses that would arise if the reinsurer were to default. For funded reinsurance, the PRA proposes that the calculation be based on the financial strength rating of the funded reinsurer and the assets in the pool supporting payments to the insurer. The regulator has abandoned an earlier idea to value the longevity reinsurance and asset portions of funded reinsurance separately on an insurer's balance sheet.

"We absolutely will expect there to be less use of funded reinsurance than we saw previously," Smith said.

In particular, it is likely to push insurers towards funded reinsurance providers with higher financial strength ratings, according to Smith. The capital charge for the large double-A-rated reinsurers will be less than the average 10% envisaged by the PRA, he said. "From the initial conversations we've had with insurers, it feels like doing transactions with single A, certainly A- funded reinsurers is going to be very difficult," Smith said. "There may still be transactions that they can do with double-A [reinsurers]."

Insurers could also lower the capital requirement by making changes to the pool of assets backing the transactions, for example, by improving the assets' credit quality. But using higher-rated reinsurers or changing the assets will also push up the price of funded reinsurance. "Within any reinsurance structure... the quantum and the credit quality [of the assets] will impact the overall price of the arrangement," Abramson said.

Just as the proposals could lower insurers' appetite for funded reinsurance, the changes "could also lessen reinsurers' appetite to participate in the market through reinsurance transactions, and encourage some to seek access through direct acquisitions or partnerships with existing PRT insurers," Fitch Ratings said in a May 5 report.

There could be some pushback from reinsurers against the plans in the consultation process, Abramson said, as they have a commercial interest in ensuring funded reinsurance remains capital efficient for insurers.

S&P Global Market Intelligence contacted a range of UK PRT writers and funded reinsurance providers, who all declined to comment.

Fewer incentives

While funded reinsurance use is expected to at least reduce, and what is used will become more expensive, this is not expected to have a big effect on the UK pension risk transfer market. Part of the reason is that funded reinsurance use varies greatly between insurers. This is partly because even those insurers that do not use funded reinsurance have been able to compete effectively for business, according to Abramson. "It would be naive to think there wouldn't be any pricing implications, but I don't think they'll be too seismic, and I don't think it will have a large impact on overall [PRT] volume," he said.

While PRT deal volumes are expected to remain high, the strain on the PRT market's capacity to do deals may be easing, thus reducing the need for funded reinsurance. Demand from pension schemes for pension risk transfer is slowing slightly as pension schemes weigh up other options, and at the same time, new competitors have entered the PRT market, Smith noted.

Sourcing assets, another reason insurers use funded reinsurance, is becoming less of an incentive as PRT writers bolster their asset management capabilities. Life consolidator Athora Holding Ltd.'s acquisition of Pension Insurance Corp. Group Ltd (PIC), the second-largest UK PRT writer in 2025 according to Hymans Robertson, gives PIC access to the asset management capabilities of Apollo Global Management Inc., one of Athora's investors. Legal & General entered a strategic partnership with global asset manager Blackstone Inc. in July 2025. "Even without this change, we may have seen insurers using [funded reinsurance] less anyway, given their focus on sourcing assets from wider sources," Smith said.

The consultation for the proposed changes closes on July 31, 2026. The PRA expects to implement the final rules on July 1, 2027. The rules will apply to funded reinsurance transactions entered after September 30, 2026.

There might be a rush to do deals before the window closes, according to Abramson. "I think we'll see quite a lot of insurers seeking to do funded reinsurance between now and the end of September," he said.