Author: Tom Addison AIA C.Act
FOR PROFESSIONAL INVESTORS ONLY
This article is a financial promotion and has been approved on 02/06/2026 by Gallagher (Administration & Investment) Limited, who is authorised and regulated by the Financial Conduct Authority.
On 29 April 2026, the Prudential Regulation Authority (PRA), published Consultation Paper CP8/26 marking a significant recalibration of the capital treatment for funded reinsurance (FundedRe) in bulk-purchase annuity (BPA) transactions.
The announcement reflects the PRAs intention to bring capital requirements more closely in line with economically similar transactions with effect from 30 September 2026 and, in doing so, enhance resilience in the Bulk Purchase Annuity (BPA) market.
Why the PRA was concerned
- Potential underestimation of risks: FundedRe structures are complex and unique arrangements. In particular, the ability of insurers to 'recapture' collateral assets under stress scenarios is uncertain and subjective. These arrangements also bring the potential for an accumulation of indirect exposure to illiquid and private-credit related assets, potentially leading to concentrated and correlated risk exposures that are difficult to fully assess.
- Increased materiality: The PRA specifically noted that FundedRe exposures have grown to represent a more significant proportion of life insurers' balance sheets when compared with other forms of reinsurance.
- Systemic considerations: The PRA highlighted that the "rapid increases in complex, difficult-to-understand and hard to analyse exposures could make the UK insurance sector more fragile"1 and highlighted that this could amplify risks at a market-wide level.
What the PRA has proposed
- Revised counterparty default adjustment (CDA): The methodology for assessing counterparty risk will now link capital requirements more directly to the credit quality, and term of the underlying cashflows (whilst still recognising the role of collateral quality).
- Higher capital charges: The PRA anticipates the capital required to back FundedRe will increase materially from c. 2–4% of annuity liability value to around c. 10% from 30 September 2026. This aligns the treatment more closely to that of comparable direct investments.
- Illustrative impact: By way of a simple (albeit extreme) example, consider a £500M transaction where 100% of the liabilities are retroceded to a reinsurer. Under the existing regime, an insurer might be required to hold around £10-20M of capital against the FundedRe risk exposure (such as the reinsurer defaulting in the future). Under the proposed treatment, this could increase to c. £50M. This represents a significant increase in capital strain and a much larger draw on the insurer's capital resources. For insurers operating with capital budgets in the region of £200-300M, a single large transaction could consume a materially greater share of that budget. This reduces flexibility to write additional business, particularly where multiple large opportunities arise simultaneously.
Why this matters to trustees
- Stronger insurer resilience: By enhancing capital requirements for these counterparty and collateral risks, the proposals strengthen the overall robustness of BPA insurers, reduce the potential for capital arbitrage, and improve overall policyholder protection.
- Confidence in the regulatory regime: Trustees can take assurance from the PRA's proactive approach in addressing emerging risks to ensure financial security and resilience in the sector.
- Pricing implications for smaller schemes: In isolation, higher capital requirements on FundedRe would place an upward pressure on BPA pricing. However, in the near term, excess insurer capacity will persist. Competitive dynamics could outweigh regulatory changes, resulting in only minor change in pricing for all but the largest transactions.
- Pricing implications for larger schemes: For mega transactions, the position is more nuanced. Use of FundedRe is more prevalent for larger schemes, meaning the impact of regulatory change is likely to be felt most acutely in this part of the market. This is compounded by practical execution challenges as insurers must deploy large premiums across sufficiently diversified, Matching Adjustment (MA)-eligible assets before full capital recognition is achieved. As a result, more capital can remain temporarily tied up on insurers' balance sheets, reducing flexibility. This may lead to more selective insurer participation, lower quoting capacity, and reduced competitive tension for the largest deals — particularly where multiple large schemes come to market in quick succession.
- Evolving investment strategies: Insurers consistently adapt their investment strategies as cost-benefit dynamics evolve to maintain competitive pricing. There will continue to be adjustments to underlying asset allocations as insurers reoptimise their investment strategies — rethinking the use of funded reinsurance, diversifying into alternative asset classes, geographies and counterparties.
Scrutiny of insurer investment strategy remains key
As insurers respond to higher capital requirements on FundedRe, changes in asset strategy are likely. This makes it increasingly important for trustees to understand not just pricing outcomes, but the underlying investments supporting them — whether through enhanced due diligence or by seeking more information from your risk transfer adviser. Key areas to consider are:
- Where will investment capital be redeployed? Including whether capital continues to be deployed overseas, the level of risk in the assets being acquired and how effectively exposures are hedged and managed.
- Market capacity considerations: The investment universe for appropriate, MA-eligible assets is limited. Insurers may need to look more broadly across asset classes and geographies to source suitable long-dated assets.
- Assessing new asset exposures: As portfolios evolve, trustees should consider whether newer or expanded asset classes offer comparable levels of security, transparency and predictability of cashflows. This is particularly important where assets may be less familiar or inherently more complex.
- Understanding structure and risk: With (potential) greater use of alternative and structured assets, the way risks are packaged and managed becomes more important. Trustees may therefore need increased focus on how assets are structured, the robustness of collateral arrangements and how risks could emerge under stress scenarios.
In a dynamic market where structures, regulation and insurer strategies are evolving rapidly, navigating these developments can be complex. Our Risk Transfer Team continues to support trustees and sponsors with clear, practical advice — combining market insight, capital and investment expertise and transaction experience — to help identify the most appropriate insurance partner and secure members' benefits with confidence for the long-term.
Please reach out to Mark Van Den Berghen or Tom Addison if you would like to discuss how Gallagher's team could support you.
Important notice
This article is for professional investors only; it is generic in nature and should not be regarded as providing specific advice or a recommendation of suitability. No action should be taken without seeking appropriate advice. There can be no guarantee that the opinions expressed in this article will prove correct.
