Alternative Capital for the Life Insurance Sector

Introduction

The Prudential Regulation Authority (PRA) has for several years been heavily focussed on developments in the UK life sector. A significant part of the focus has taken the form of tightened regulatory expectations around funded reinsurance (FundedRe) arrangements, with potential knock-on implications for underlying bulk purchase annuities (BPAs).

In a speech on 18 September 2025, the PRA delivered a further update on its evolving approach to the growth of FundedRe in the BPA market (which we discussed here: PRA update on approach to FundedRe). Alongside its near-term regulatory priorities, the PRA also signalled a notable shift in its stance on capital innovation in the UK life sector and, on 14 November 2025, the PRA followed up with a wide-ranging discussion paper exploring potential methods for life insurers to increase access to alternative capital, with a clear focus on longevity-type exposures. The PRA specifically examines the potential for UK insurance special purpose vehicles (ISPVs) to access capital market investments for life risks, together with other structures used in the banking sector.  The discussion paper is conceptual in feel, and sets out a long list of questions intended to prompt a round of industry engagement with a deadline for comments of 6 February 2026.

Overview

To preface, the PRA notes constraints on traditional sources of new capital for life insurers, such as equity issuances, together with the relatively high cost of capital for public equity. This has led to increased appetite amongst life insurers for reinsurance, as well as joint ventures and partnerships, alongside a pivot to capital-light business models. Although not expressly stated, the PRA indirectly alludes to the increased participation of private equity (and other private capital) in UK life markets. It is clear from all of the PRA's communications on the topic of FundedRe in recent years that there is a concern around the systemic use and complexity of FundedRe, and a desire to introduce more targeted transaction structures to help to allay this concern.

Accordingly, the PRA is now looking at ways for life insurers to broaden access to 'patient, long-term' capital, being capital:

• That is invested in line with the long-term nature of a life insurer's liabilities;
• Where the investor is willing to forgo an immediate return in anticipation of more substantial returns over time;
• Which allows higher-yielding UK productive investments to be developed over time, (rather than seeking assets that have already been originated);
• Which reinvests in growth and avoids a concentration of counterparty risks; and
• Which allows such 'patient' investors to obtain greater (and smoother) returns, as well as the prospect of life insurers freeing up existing capital and capacity.

Key principles

In the discussion paper, the PRA sets out the following principles for any such structure:

• Principle 1: The quality and quantity of capital required to support insurance risks should not be reduced as a result of alternative life capital structures. In particular, the funding mechanism and structure of any notes issued to investors should not be of lower quality than other capital instruments issued by the life insurer.
• Principle 2: Any risk transferred to the capital markets through such a structure should be contractually bounded and time-limited. This principle is designed to remove any expectation of a future need for re-capitalisation, thereby implying that a third-party investor will likely not be prepared to accept such risks on an open-ended basis. This might also be seen as a proxy for the 'fully funded' method used in an ISPV context, recognising that it may not be possible to capture all of the risks in a longevity book. This also links to the question, flagged below, as to the duration of such an investment, and how an investor may exit ahead of the stated maturity date.
• Principle 3: A life insurer should manage tail and residual risks resulting from its use of such structures. In a departure from its approach to conventional reinsurance arrangements, the PRA proposes that an arrangement that covers up to a 1-in-200 level or a 10-year protection on a 30-year underlying insurance risk might not qualify as a full risk transfer per se. Further, such structures should not generate material gaps between the risks and the funding that is in place (i.e. basis risk).
• Principle 4: Such structures should predominantly result in capital relief, as opposed to balance sheet financing. Here the PRA explicitly recognises that replicating close matching of asset and annuity liability in alternative life capital structures may be impractical and lead to regulatory arbitrage opportunities. The PRA recognises that alternative life capital structures may, like a reinsurance arrangement, in some instances result in a 'day one' reinsurance recoverable covering part of an insurer's technical provisions, but this should not be their core aim. In this respect, the intended consequence should be a reduction in regulatory capital requirements "justified by a commensurate transfer of risk," helping to control a life insurer's exposure to the investor and to limit the potential for the vehicle's assets to be managed in a manner that is not aligned with the UK Solvency II regulatory framework.
• Principle 5: A life insurer should only use such arrangements for a limited portion of its risks and balance sheet, i.e. a level of risk retention by the insurer is necessary. Likewise, such structures should not allow an investor to originate and then distribute all the life insurance risks it underwrites. This, together with Principle 6 (below), is likely to reflect concerns around systemic issues (carried across from the GFC, and in turn Solvency II) of excessive concentration risk and inter-dependence in (and as between different segments of) the financial services sector.
• Principle 6: Such structures should not reduce the control a life insurer has over the management of its business. The life insurer should retain full control of the key operations of its business, including key investment decisions, determination of surplus, as well as governance and claims, as if the risks had not been ceded to an external investor.

Case studies

For discussion purposes, the PRA sets out a series of case studies/potential methods for the transfer by a life insurer to the capital markets of defined tranches of life risk. These comprise (on a non-exhaustive basis):

• An ISPV structure, similar to those currently in place in the United Kingdom for the transfer of general insurance (GI) (in particular natural catastrophe) risks to the capital markets;
• A 'sidecar' structure commonly used in other jurisdictions in the life and annuity sector e.g. Bermuda; and
• A 'significant risk transfer' or 'SRT' structure commonly used in the banking sector in respect of credit risk on a portfolio of debt assets.

We examine these in more detail below.

ISPV

The United Kingdom already has a regulatory regime – pursuant to the Risk Transfer Regulations 2017 – for the transfer by an insurer of risk to a 'risk transformation vehicle' or ISPV, which in turn draws risk capital from external investors. To date these structures, such as the London Bridge 2 structure in relation to the Lloyd's market, have focussed on GI risk.

There are, of course, clear differences between GI and life risk.  To take the example of an annuity book: (i) the relevant liabilities already exist; (ii) the maximum liability may not be known; and (iii) some supporting capital already exists in the form of premiums received (e.g. in the case of a BPA, by way of simplification, the former pension scheme assets transferred by way of premium). By contrast, in a typical open GI book, the liabilities are typically 'yet to materialise' and the maximum liability can be readily assessed (i.e. by reference to the limits and deductibles in the underlying policy terms).

Sidecar

A reinsurance sidecar is a vehicle established to raise third-party capital to support insurance liabilities (including life and annuity risks), often on an ongoing (flow) basis. Typically, the sponsoring life (re)insurer retrocedes risk and associated upside to the sidecar, which in turn provides the necessary risk capital. Such sidecars are designed to be long-term in nature to match the underlying liabilities, and typically involve an equity investment by the incoming investor.

SRT

A 'significant risk transfer' or SRT structure allows (typically) a bank to transfer credit risk on a portfolio of debt assets to a third-party investor. In a typical 'funded' SRT structure (i.e. where the investor acquires or otherwise funds a portion of the underlying assets), the investor effectively reimburses the bank for losses realised as a result of credit events that occur in a loan portfolio (e.g. bankruptcy, failure to pay, and restructuring). See as follows for further detail Synthetic Risk Transfer SRT in 2025 | Insights | Mayer Brown. Given its focus on credit risk, we wonder whether this particular choice of case study may mirror comments made by the PRA in its speech in September 2025 (referenced above) about the need to "unbundle" the asset/investment and longevity components of a FundedRe transaction, and the need to apply a more stringent regulatory treatment to the former (potentially even characterising the asset leg as a loan).

Further questions and next steps

The PRA sets out in its discussion paper numerous questions for industry feedback. Although the deadline for comments is expressed to be 6 February 2026, our expectation is that industry consultation and discussion will continue beyond that date. In our view, additional areas of focus might also include: 

Cashflows

• Methods for investors to collect coupon and/or the principal amount ahead of expiry of the underlying/reference risks. Equally, methods to provide that a downturn in the performance of the underlying/reference risks should erode the amount of coupon and/or principal due back to the investor.
  To consider also whether this might turn on a concept of release of embedded value, borrowing from methodology used in the several securitisations of emerging profit on long-term insurance books undertaken in the early 2000s (e.g. Friends Provident, Gracechurch Life, Box Hill).
• Relatedly, the right 'mix' of collateral as between, for example, in the case of pension risk transfer, the existing backing assets and the 'new' money put in by investors.

Exit

• Methods for an investor to exit its participation. This might take the form of a commutation with the ISPV (or equivalent) or transfer of its participation (via an active primary or secondary market). To consider whether there is a role here for a regulatory capital 'grace period' to allow for any unexpected gaps in participation as between outgoing and incoming investors.
• The scope of termination events in favour of the investor that may be permissible in such a structure.

Tax treatment

• The global competitiveness of the United Kingdom as the host for such alternative structures should be considered against the incumbent (typically offshore) jurisdictions such as Bermuda. In the case of an ISPV, technical amendments to the Risk Transformation (Tax) Regulations 2017 should make clear that such risks are subject to the appropriate tax treatment.

Regulatory capital treatment

• The regulatory treatment of the ISPV (or equivalent), including as to whether (or the extent to which): (i) the life insurer in question benefits from a matching adjustment (MA) in respect of its asset with the ISPV (or equivalent); and (ii) in turn whether the ISPV (or equivalent) benefits from an MA (in respect of the deposited assets), the benefits of which it may pass on to investors.
• The scope for explicit regulatory capital credit (for the life insurer in question) for protection purchased by way of derivative, guarantee or other mechanism (other than reinsurance). Relatedly, the scope for a diversification credit to reflect the range and sector-variegation of the protection providers selected.
• The extent to which such capital treatment turns on the identity/financial strength of the investor and in particular the impact of ratings. Relatedly the role and effect of any collateral provided by the investor with respect to such a structure. Similarly, the extent to which an investor may be permitted to syndicate its participation with other investors.

Other

• The role for parametric triggers in order to make these risks more straightforward for investors to assess and price.
• The extent to which the PRA would expect to vet or approve such a structure in advance.
• Relatedly, the question of whether the PRA currently has the bandwidth to deal with the potentially vast markets waiting to invest in UK life risks via these exciting potential new avenues.