PRA update on approach to FundedRe

In its priorities for 2025, the Prudential Regulation Authority (PRA) signalled that it would remain focused on the bulk purchase annuity (BPA) market.¹ In a speech on 18 September 2025, the PRA has duly delivered a further update on its evolving approach to the rapid growth of funded reinsurance (FundedRe) in the BPA market. This sets out its near-term regulatory priorities as well as a notable shift in its stance on capital innovation in the UK life sector.  

The key points are as follows. The PRA:

• Is now debating 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.
• In parallel is also looking at ways to broaden access to 'patient, long-term' capital, including a review of the UK's ISPV regime as a potential channel for capital to support longevity and related risks; further industry engagement and consultation are expected later this year.

Bundled Asset and Longevity Risk

Overall, the PRA does not seek to prohibit the usage of FundedRe as a 'modest' part of a firm’s overall funding strategy, and sees limited risks to its objectives from the use of FundedRe as a means for the reinsurer to gain indirect exposure to asset classes beyond its origination. However, it remains concerned about arbitrage across different reserving approaches, capital requirements and investment flexibility as applicable to the cedant and the reinsurer, deeming that these could lead to systemic risk.

These concerns are accentuated in the case of the (typically) very large up-front premium received by the FundedRe reinsurer, and used by it to make payments necessary for the cedant to meet its BPA obligations. FundedRe is in some senses the cedant's own BPA with a reinsurer, and is therefore very different from a conventional longevity swap, where smaller payments flow either way as between cedant and reinsurer over the lifetime of the contract, to cover actual deviations in experience from central assumptions, but do not cover the principal BPA obligations. The PRA is now asking whether the existing Solvency UK reinsurance framework provides the right treatment for FundedRe transactions. In particular, whether the asset portion of a FundedRe transaction should be viewed (and treated) as more akin to a collateralised loan from the cedant to the reinsurer, and as such be subject to higher capital charges for the cedant.² The PRA will be holding a series of roundtables with the industry on this topic later this year.

Mayer Brown's preliminary view is that it would be surprising to view a cedant as a ‘lender’ in this way. There are major differences between reinsurance and a loan, including the following:

• A cedant (unlike a lender) transfers a pre-existing risk to the reinsurer. While a loan and a reinsurance arrangement both generate credit and counterparty risk, a reinsurer is invariably regulated. A borrower will typically not be regulated, hence the requirement for a higher capital charge for a loan at the level of the insurer/lender.³
• A cedant (unlike a lender) would never be expecting to get the principal amount back by way of bullet (other than in the remote event of termination/recapture). Again, this may be justification for a lower capital charge (as compared with a loan) at the level of the insurer/cedant.
• A cedant (unlike a lender) is not due fixed interest; rather, it is due a variable return to reflect the risks that it has transferred to the reinsurer.
• Whilst a collateralised loan and reinsurance may have some common features, market practice as to the nature of the collateral varies widely. For example, in the case of FundedRe, collateral may even be held by the cedant itself on a funds-withheld basis albeit with security in favour of the reinsurer.

Moreover, the analogies - in some respects - between a BPA and FundedRe mean there is a potential inconsistency in approach here.

Nonetheless, the bundling concern is fundamental and we are already aware of alternative transaction structures which seek to avoid this, particularly where there are asymmetric asset and longevity components.

Alternative risk transfer for long-term life insurance risk

In Vicky White's speech, the broader alternatives to FundedRe to support the sector's need for 'patient, long-term' capital were also considered. One such alternative is the use of insurance special-purpose vehicles (ISPVs) alongside traditional longevity reinsurance or to cover specific asset risks on an insurer's balance sheet. The PRA will, in collaboration with HM Treasury, be publishing a discussion paper on alternative life capital options later in the year, and seeking further engagement with the industry.

The prospect of a UK ISPV regime for longer tail, longevity or annuity risks is both intriguing and, as the PRA notes, challenging.  On one view, it is curious that the PRA should object to one form of collateralised arrangement (FundedRe), and yet consider proposals to replace it with another—i.e., a fully funded ISPV. There are also clear differences between longevity risks and e.g. natural catastrophe risk for these purposes including that (i) the relevant longevity liabilities already exist, (ii) they may not readily be capped, and (iii) the supporting capital already exists in the form of the (former) pension scheme assets. In Mayer Brown's view, key areas of focus should include:

• The meaning of 'fully funded' in the context of longevity risks - which may extend 50/60 years into the future⁴ – and the right ‘mix’ of collateral as between the former pension scheme assets and the 'new' money put in by investors.
• Relatedly, the regulatory treatment of the ISPV, including (i) ensuring that the cedant benefits from a matching adjustment (MA) in respect of its reinsurance asset with the ISPV and (ii) in turn whether the ISPV benefits from an MA (in respect of the deposited assets), the benefits of which it may pass on to investors.
• Methods for investors to collect on the principal investment ahead of expiry of the underlying/reference risks. This may turn on a concept of release of implicit value, borrowing from methodology that is well-tested under the several VIF securitisations undertaken e.g. in the years between the GFC and the implementation of Solvency II. Equally, a downturn on the performance of the underlying/reference risks should erode the amount of principal due back to the investor.
• Methods for investors to exit their participation (e.g., via a form of commutation with the ISPV) or transfer their participation (via an active primary or secondary market).There may also be a role here for a regulatory capital 'grace period' to allow for any unexpected gaps in participation as between outgoing and incoming investors, and we note here that the PRA has included the concept of a grace period (albeit at the start of an ISPV's operations) in its latest rules on ISPVs.
• Technical amendments to the Risk Transformation (Tax) Regulations 2017 to make clear that such risks are subject to the appropriate tax treatment. Relatedly, this should include clarity on the tax treatment of fees that may be due from the ISPV to an investor to the extent that the investor proposes to continue to manage the assets that are held for the benefit of the ISPV.

Overall, however, this appears to be an important first step on what many see as a necessary journey – i.e. the mutualisation of society's growing longevity exposure with the international capital markets. The PRA and the UK are well placed to become market leaders in this field.

³ The PRA does note that a cedant is required to hold capital against a credit default adjustment (CDA) as well as counterparty default risk (CDR), but that the calculation of these costs is highly subjective due to the absence of data, resulting in very low CDAs and CDRs.

⁴ The clear requirement from Solvency UK’s current ISPV regime, is that the ISPV should be fully funded at all material times. In other words, the ISPV’s entire obligations to the underlying cedant should be matched by the amounts subscribed by the investors at the top of the structure.