The Prudential Regulatory Authority (PRA) has long expressed its dislike of UK business moving offshore to what it calls lightly-regulated offshore jurisdictions. Particularly when it comes through funded reinsurance. Last year the regulator fired a warning shot signaling to participants of changes to come. And now the shot has landed. The outcome has not been good.
When it was first issued last year, the PRA’s announcement on funded re scrambled minds. While it was known that the PRA was investigating the UK’s growing life reinsurance business, the extent of its investigations into funded re—and proposals to counter it—came as a shock.
The September speech by Vicky White, Director of Prudential Policy at the PRA, announced a clampdown on funded re—which it estimates to be around £40 billion in volumes to-date—with proposals that ranged from unbundling the risks in funded re deals to higher capital charges.
The speech sparked a vociferous response by life re-insurers who had been merrily using funded re to transfer liabilities offshore to support a burgeoning domestic bulk purchase annuities (BPA) business.
By the start of this year, following a series of closed doors roundtables where the PRA consulted with the industry, participants felt the authority may have softened its tone. At the Life-Re event in Europe Frankfurt, there was some warmth of feeling towards the regulator (see Europe’s Need for Air), and praise for its ingenuity in looking into the matter.
And then, in the last days of April when many might be dreaming of their holiday on a deserted beach somewhere—Bermuda, perhaps—the PRA released its consultation paper which arrived like a hard slap on a rainy day.
It would be understating it to say participants are aggrieved.
So what are the proposals? From October, new funded reinsurance business will face a capital charge “of around 10%” from 2% to 4% now, to bring it into line with the 11% to 15% charge on “similar investments.”
The aim, said the PRA, is for funded re to be treated more like other investments that UK life insurers hold, “ending a regulatory inconsistency.” It is not clear what these similar investments are, though they likely take their basis from the private assets that international reinsurers are said to have been putting money into.
“As a result, UK life insurers using funded reinsurance will hold capital which better reflects the risks from the default of their reinsurance counterparty, particularly where the reinsurer has a lower credit rating or where they hold riskier collateral,” said the PRA.
Participants in the industry last year predicted a rush of deals being squeezed out before the PRA hit the market with any new proposals. This year, only a handful of deals have been issued. There may be more before the October deadline, but what after?
The PRA seems clear on the future direction of this market.
“The proposals should reduce incentives for firms to choose funded reinsurance over other sources of capital,” it said, while adding that should at least “support future resilience and also drive more direct investment in its place, including investment in the UK economy.”
It does not augur well for the industry.
“I don’t expect many thought those changes were coming to the extent they have made them,” says one reinsurer who asked to remain anonymous. “I don’t think anyone is a fan of what they’ve done. There’s a consultation coming, which we’ll be submitting to.”
That seems to be the general opinion across the industry. If one is to look at positives, the PRA has, at least, dropped the unbundling approach it originally mooted—a bonus for those who feared they would get caught up in a quagmire of operational complexity, making new deals all but prohibitive.
“The good news is that the PRA has moved to a more operationally workable solution from their initial proposals,” says Bob Tyley, Head of Insurance Investment & ALM, Hymans Robertson. However, the capital level calibration is “still significantly higher than what many would view as appropriate,” he adds.
Entering into a funded re transaction post-October will be significantly more expensive for insurers and lead to a potential front-end pricing reset. That most hurts insurers with constrained solvency positions.
From the reinsurer perspective, the PRA’s proposals may benefit the largest, higher-rated global reinsurance groups, who could still carry out this business without prohibitively steep deal costs. However, the rules will likely destroy business for smaller, lower credit quality reinsurers.
“For the highly rated reinsurers, they will still be offering the sustainable solutions,” says the anonymous reinsurer. “These will offer the lowest capital requirements of all options going forward. For the unrated or poor rated reinsurers, their business is effectively killed.”
“The UK is not the centre of the funded re universe. They are one consideration for European regulators,
who are also at a different stage of the funded re development.”
So, in a nutshell, the PRA’s intervention will put huge pressure on UK insurers to choose more selectively when entering into future funded re deals.
One UK insurer, also active internationally, has been looking through the consultation paper. One of the key points for them is that the PRA’s funded re move will hit markets outside the UK.
“One thing is that there are bound to be repercussions for the international reinsurance markets as well.”
No doubt international regulators will be assessing the PRAs move for their own markets. In Europe, which has only seen a handful of deals so far, the PRA may not be that much of an influence, says one reinsurer active in the European markets.
“The UK is not the centre of the funded re universe,” says the reinsurer. “They are one consideration for European regulators, who are also at a different stage of the funded re development. European supervisors like EIOPA are also looking to the US and Japan/Asia in formulating their views.”
Indeed, regulators speaking at last month’s Life-Re Europe 2026, seemed to express a more open-minded approach to asset intensive reinsurance than their UK peers (see The Regulators Angle).
The PRA’s consultation closes on 31 July this year. Tyley believes the industry will fight hard to get a better calibration of the capital charge. But, given insurers have already spent time in closed-door roundtables with the regulator, it seems unlikely the rules will shift dramatically in the final shake up.
For the future, the new rules may see UK insurers diversify into alternative asset strategies to optimise pricing, says James Silber, Partner at consultancy LCP. There is also the knock-on effect on BPAs. Charlie Finch, LCP Partner, believes the funded re proposals have the potential to impact overall market capacity and pricing of this market, where it had previously predicted to see over £350bn of assets transferred from pensions schemes to insurers over the next decade.
The PRA may argue that its work will pay off should there be a future crisis that roils insurance and asset markets internationally. Which is a bit like putting a guard on your nose then smashing up the rest of your face to prove you were right. All-in-all, it sounds like a no-win situation for insurers.
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