The Prudential Regulation Authority of the United Kingdom has proposed new rules to tighten the treatment of funded reinsurance, warning that rapid growth in the market could pose risks to insurers.

Under proposals published this week, capital held against funded reinsurance transactions would rise, with the PRA estimating that requirements for an average deal could increase to about 10 per cent of annuity liabilities from 2 per cent to 4 per cent.

The PRA estimates that British life insurers have £40 billion (about $54 billion) in funded reinsurance exposure and has warned that this could grow if left unchecked.

Funded reinsurance, widely used by insurers in the bulk purchase annuity market, typically involves transferring liabilities to a reinsurer, often based in Bermuda or another offshore jurisdiction, which then invests assets to support future payments. Bermuda’s life reinsurers have more than $1.5 trillion of assets under management, with many life reinsurers connected to North American private capital groups that invest UK pension assets with their own funds, including Apollo, Brookfield and Blackstone.

The sector serves about 90 million policyholders worldwide, with less than 10 per cent in the UK, and maintains a capital surplus of $238 billion, with the Bermuda Monetary Authority noting that most firms remain well capitalised even under stress conditions. The BMA enforces capital standards aligned with European Solvency II rules.

However, in a statement, the PRA said the changes were needed because the current framework “does not appropriately reflect the underlying risks” and encourages too much reliance on the arrangements.

Sam Woods, the UK deputy governor for prudential regulation and chief executive of the PRA, said: “Funded reinsurance is growing rapidly and has the potential to undermine the resilience of insurers if not managed properly. Today’s proposals aim to iron out the discrepancy in the regulatory treatment for these deals, to protect pensioners and improve insurers’ incentives to invest directly in the UK economy.”

The PRA added that its most recent life insurance stress test uncovered the potential impact of such arrangements, noting that solvency coverage for firms recapturing funded reinsurance fell by about 10 percentage points at year-end 2024 “even with the relatively small exposures on the books”.

The consultation paper also warned that more growth could lead to a “rapid build-up of underestimated risks” and “threaten the stability of the UK insurance industry”.

The regulator said it was concerned about the structure of these transactions because many counterparties have similar credit-focused business models. There has been an increase in the use of “illiquid and private credit-related assets” in collateral pools, it said.

It added that the framework “materially underestimates the associated risks and creates misaligned incentives to use these arrangements excessively”, which could lead to a wider misallocation of capital.

The PRA said its proposals were designed to be simple and reduce incentives for using funded reinsurance.

The UK’s move follows similar scrutiny elsewhere. The Financial Services Agency of Japan has proposed tightening oversight of life insurers transferring risks to reinsurers, including strengthening requirements around collateral, asset management, concentration risk and stress testing, after a series of multibillion-dollar transactions involving Bermuda firms.

Suzanne Williams-Charles, CEO of Bermuda International Long Term Insurers and Reinsurers, told The Royal Gazette:

“The [PRA] is responsible for the prudential supervision of insurance firms within its remit, which includes ensuring the safety and soundness of those entities and contributing to the stability of the UK financial system through the setting and enforcement of regulatory standards.

With respect to the impact on Bermuda, as of December 31, 2024, less than 5 per cent of total reserves held by Bermuda long-term reinsurers is from UK cedents.“

Industry representatives in Bermuda have said that more scrutiny is expected as the sector expands. Ms Williams-Charles told the Gazette earlier this month that it was “perfectly normal” as the market evolves.

She added that recent changes by the BMA had already strengthened disclosure, stress testing and governance requirements.

She added: “This increased transparency puts Bermuda in a good position to respond to questions around liquidity and asset quality.

“What’s most important is asset-liability matching.”

The PRA said it had taken industry feedback into account in designing its proposals, including discussions with insurers and the Insurance Practitioner Panel.

The consultation is open until July 31, with the proposed changes set to apply to new funded reinsurance transactions from October 2026.