PRA consults on changes to funded reinsurance

April 2026

On 29 April 2026, the PRA published a consultation paper setting out proposed changes to the capital treatment of funded reinsurance (FundedRe) transactions under Solvency UK. The proposals are intended to address differences in capital outcomes between FundedRe) and what the PRA views as economically similar exposures. If implemented, the changes would have significant implications for the attractiveness of FundedRe transactions, and flow on implications for the Bulk Purchase Annuity (BPA) market they support. There may be a rush to complete transactions in advance of the October 2026 deadline to secure grandfathering.

The proposals represent a notably assertive intervention by the PRA and a departure from its principles-based approach. In substance, the regulator is seeking to reframe FundedRe as an exposure that more closely resembles a risky corporate credit, notwithstanding its collateralised nature. By significantly increasing the capital treatment, the PRA appears less focused on incremental risk calibration and more on materially reducing the capital efficiency of FundedRe structures, signalling a clear supervisory intent to curb their use rather than simply refine their prudential treatment.

Proposals - at a glance

Higher capital requirements

Capital held for the average FundedRe transaction, entered into from October 2026 onwards, would increase materially.
Revised credit risk treatment

Credit default allowance (CDA) to align with fundamental spreads for financial corporate bonds, calibrated by credit quality step (CQS) and maturity at cashflow level.
Standardised approach to CQS

CQS would be derived from reinsurer insurer financial strength (IFS) ratings, with scope to increase by up to three notches, with strictly defined criteria for each increase. Where no external rating is available, a conservative default would apply.
Impact on transaction economics

Changes would alter the relative attractiveness of FundedRe and may affect BPA pricing and structuring.
Further measures not ruled out

The PRA has considered alternative approaches and has not discounted additional policy action, including limits on volume.

Actions for firms

Monitor policy direction

Consider engaging with the consultation and policy making process, including potentially developing analysis on comparability of FundedRe against corporate credit; track for the consultation outcome and potential further policy developments.
Assess transaction pipelines and timing

Review planned and pipeline transactions to identify those that could complete ahead of the proposed implementation date and those likely to fall within scope.
Review capital strategy and deployment

Assess the impact of the proposals on capital allocation, balance sheet strategy and the role of FundedRe within BPA business models.
Consider alternative risk transfer and hedging options

Including sidecars and other capital‑markets solutions as viable alternatives to FundedRe.
Investigate alternative investment options

Consider the relative attractiveness of alternative investment options, including direct asset holdings.
Revisit BPA pricing assumptions

Consider implications for BPA pricing where FundedRe has been assumed as a source of capital benefit.
Prepare for operational change

Identify required updates to modelling, reporting, credit assessment processes and supporting systems.

Background and policy context

FundedRe is a form of collateralised reinsurance that transfers some or all of the asset and liability risks associated with an annuity portfolio to a third party. Its use by UK life insurers has increased in recent years, particularly to support BPA business. According to the consultation document, in recent years about 15% of new BPA business has been ceded via FundedRe arrangements.

The proposals in this consultation build on earlier supervisory activity, including a 2024 supervisory statement, a Dear CEO letter and a Dear CRO letter on the solvency-triggered termination rights. A FundedRe recapture scenario was also explored in the 2025 Life Insurance Stress Test (LIST). The PRA has consistently highlighted its concerns in relation to FundedRe, noting the rapid growth in its use, and the scale and complexity of some arrangements. The PRA states that FundedRe can result in materially different capital outcomes compared with economically similar exposures held outside a reinsurance structure, raising questions about consistency, transparency and the potential for regulatory arbitrage.

Alongside capital considerations, the PRA has pointed to risks associated with concentrated exposures, reliance on collateral quality and availability under stress, and the potential implications for firms’ resilience should multiple funded reinsurance arrangements unwind simultaneously. These concerns have informed the PRA’s view that further policy intervention is necessary to ensure the prudential framework continues to support safety and soundness as the BPA market and the use of FundedRe continues to develop.

The PRA has gone further than its global peers in regulating funded reinsurance. These rules propose a significant increase in the capital treatment of funded reinsurance and build on the extensive work already done around risk management. Insurers may question this departure from the principles-based framework and the wider growth agenda, while the PRA will continue to argue the rules are necessary to protect policy holders and the stability of the UK insurance sector. Insurers with exposure to funded reinsurance will waste no time in reviewing what the proposals could mean for their existing arrangements, capital positions and future transaction planning. Firms will also want to revisit how their governance and risk management align against this direction of travel.

Huw Evans

UK Head of Insurance at KPMG

Overview of the proposals

Alignment of capital requirements

The PRA estimates that, for the average existing funded reinsurance transaction, insurers currently hold capital of around 2% to 4% of the value of underlying annuity liabilities, compared with around 11% to 15% for economically similar investments. Under the proposed changes, required capital for the average existing transaction would increase to around 10%. While this would not fully align the treatment of FundedRe with that of direct asset exposures, it would represent a significant narrowing of the difference, notwithstanding the presence of collateral backing FundedRe arrangements.
Definition of funded reinsurance

The PRA is proposing to introduce a formal definition of “funded reinsurance” into the PRA Rulebook. The proposed requirements would apply to UK life insurers entering into new arrangements as cedants to back annuity or capital redemption liabilities, reflecting the similar long‑term asset risks of these businesses.

The requirements would not apply to intra‑group funded reinsurance arrangements that meet specified criteria (including where there is no increase in group surplus and no material risk transfer to third parties), nor to temporary reinsurance arrangements used in advance of a Part VII transfer, where the reinsurance is only in place pending completion of the legal transfer.
Credit default allowance calibration

The consultation proposes changes to the treatment of credit risk within FundedRe arrangements through revisions to the CDA. In particular, the PRA proposes that the CDA applied to FundedRe cashflows should be calibrated by reference to the fundamental spread for financial corporate bonds, matched to the CQS and maturity of each cashflow. This approach would align FundedRe more closely with the Solvency UK treatment of comparable credit exposures.
Impact on balance sheet

The CDA will reduce the value of the reinsurance asset on the base balance sheet. There are no new requirements on the SCR. However, the new approach to CDA will need to be stressed in line with any internal model approach to Funded Re, in line with existing regulatory expectations.
Determination of credit quality step

To determine the applicable CQS, the PRA proposes that firms should start from the reinsurer’s insurer financial strength (IFS) rating issued by an external credit assessment institution. Firms would be permitted to apply up to three independent upward notches where justified. Where an IFS rating is not available, firms would instead apply CQS 3, less one rating notch. The PRA notes that this approach is intended to promote consistency and prudence in the treatment of credit quality across firms.

Approach to notching upgrades

The PRA proposes to allow firms to adjust the CQS implied by an insurer financial strength (IFS) rating by up to three independent upward notches, reflecting common credit‑enhancing contractual features in FundedRe arrangements and drawing on notching principles used for covered bonds and structured finance. The notches would be determined by reference to contractual terms, rather than to firms’ actual exposures, which the PRA considers a more proportionate approach given the operational complexity and cost of ongoing collateral reassessment.

Notches can be used in the following circumstances:

One‑notch upgrade may be recognised where the arrangement is fully collateralised at inception and thereafter adjusted only for market movements and claims experience;
Second notch may be recognised where the collateral does not require transformation to meet contractual cashflows, evidenced by the collateral portfolio being 100% Matching Adjustment (MA) eligible under the firm’s existing permissions and any residual cashflow mismatches not giving rise to material risk.
Final notch where the collateral is credit‑enhancing, meaning its credit quality is no lower than that of the counterparty. In assessing collateral quality, firms may use internal ratings where consistent with their existing methodologies, otherwise applying a prudent default, such as assigning unrated assets a CQS of 4.

Costs and impact of the proposals

The PRA estimates that the industry‑wide cost of implementing the proposals would be below £500,000 per year, when annualised over a ten‑year period, and could be lower or zero if firms reduce or cease their use of FundedRe in response to the changes. However, this cost‑benefit assessment is unlikely to resonate with affected firms, whether viewed narrowly in terms of systems and process costs or, more significantly, in terms of the wider economic impact.

The PRA acknowledges potential impacts on BPA pricing for pension schemes but expects these to be limited, citing market competitiveness and the relatively small share of BPA transactions involving FundedRe.

The PRA estimates that, assuming firms make no change to their current use of FundedRe, the proposals could result in additional initial capital requirements on new business of around £700 million per year across the market.

Implementation timelines

The PRA intends for the revised requirements to apply to FundedRe transactions entered into from October 2026 onwards, with the revised requirements applied in insurers’ calculations from 1 July 2027. Existing arrangements are out of scope.

Implications of the proposals

While the proposals do not prohibit FundedRe and the PRA recognises some legitimate uses, the regulator is clear that they are intended to reduce transaction volumes - or at least constrain growth. The PRA also signals that it has considered a range of policy options and leaves open the possibility of further measures, including volume limits.

Taken together, the proposals would result in materially higher capital requirements for FundedRe transactions relative to the current treatment, reducing the economic attractiveness of such arrangements. Insurers may therefore wish to reassess the relative merits of FundedRe compared with alternative balance sheet solutions, including alternative risk transfer solutions such as side cars and hedging. Alternatively – or in addition – insurers may reevaluate the relative attractiveness of holding assets directly. The rule change may thus have the impact of discouraging collateral with high credit ratings in favour of either direct holdings or alternative risk transfer solutions.

In addition, the proposals place greater emphasis on the credit quality of FundedRe counterparties (which may also be reflected in reinsurance pricing), meaning firms may need to take a more selective approach to counterparty selection, given the more favourable capital treatment available for transactions with higher‑rated reinsurers. Similarly, insurers may want to strengthen contractual protections and review collateral structures, as this would also go some way towards softening the capital impact of the policy change.

Given the role of FundedRe within BPA business models, if implemented, the proposals would also have implications for BPA pricing and transaction economics. As noted in Gareth Truran’s (PRA Executive Director, Insurance Supervision) speech on the day of the consultation’s publication, insurers are currently facing significant competitive pressure on margins in the BPA market. Against this backdrop, firms may need to reassess pricing assumptions where funded reinsurance has been used as a material source of capital efficiency.

Given the October 2026 implementation, firms may also look to bring forward FundedRe transactions for completion in advance of this date.

Next steps

The PRA is seeking feedback on the proposals. Subject to responses received, it intends to publish a policy statement setting out final rules and expectations.

Firms with existing or planned funded reinsurance arrangements may wish to consider the potential capital, operational and strategic impacts of the proposed changes, including the interaction with wider BPA strategies and Solvency UK capital planning.

How KPMG in the UK can help

KPMG supports life insurers, reinsurers and investors across the full lifecycle of FundedRe arrangements and wider BPA strategy. Drawing on our insurance regulatory, actuarial, transaction and risk teams, we can help firms respond pragmatically to the PRA’s proposals and their broader strategic implications.

In particular, we can support firms to:

Assess capital and balance sheet impacts

quantify the impact of the proposed capital and CDA changes on existing business models, new business pricing and capital deployment, including interaction with internal models, MA permissions and Solvency UK requirements.
Evaluate alternative risk transfer and balance sheet strategies

Assess the suitability of alternative risk transfer approaches such as sidecars, capital markets structures, direct asset strategies and other risk‑transfer mechanisms, considering capital efficiency, operational complexity and strategic fit.
Review and redesign investment strategies

assess how the proposed changes affect the relative attractiveness of direct asset holdings and alternative investments, including implications for asset allocation, MA eligibility, credit quality and liquidity, while focusing robust risk management, particularly in light of the PRA’s increased scrutiny in this area.
Strengthen governance, risk and operational readiness

support enhancements to modelling, credit assessment, collateral governance, documentation and reporting processes to align with supervisory expectations.
Advise across BPA strategy and pricing

help firms reassess BPA pricing assumptions, competitiveness and margin sustainability in light of higher capital requirements.

We work closely with boards, senior management and transaction teams to provide coordinated support, combining deep regulatory insight with practical implementation.