The Prudential Regulation Authority (PRA) has outlined how it expects bulk purchase annuity (BPA) insurers in the UK to manage increased growth and complexity in the market, including on the use of funded reinsurance.

The authority stated that it continued to see rapid growth in the BPA market amid high demand for defined benefit (DB) pension scheme risk transfer solutions.

The PRA said that it expects BPA insurers to proactively manage their capacity to support growth in a “prudent manner”, and ensure that high levels of competition do not weaken firms’ pricing disciple and incentivise weaker risk management standards.

To meet demand, BPA transactions’ structure and complexity were evolving, the PRA noted, with features such as long price locks, trustee termination options, and in specie premiums bringing additional sensitivities to balance sheets that may require new risk management approaches or limitations to the exposure to such features.

“We expect firms to ensure that their risk management and control frameworks keep pace with changes in business practice and with evolving transaction features,” the PRA stated.

The PRA added that it would continue to focus on funded reinsurance in 2025, amid concerns from the PRA and Financial Policy Committee that the current growth in funded reinsurance transactions could lead to a rapid build-up of risks in the sector and has the potential to pose systemic risks.

However, insurance firms’ self-assessments showed they were not yet fully meeting the PRA’s supervisory expectations in this area.

While remediation plans were in place in many cases, the PRA said that further work was likely to be required.

“For example, firms’ current internal investment limits for aggregate exposures appear insufficient to prevent a build-up of systemic risk in view of current activity trends,” the PRA stated.

“Firms’ single name exposure limits also do not currently appear to align with our expectation that single counterparty exposures should not threaten firms’ ability to meet their solvency risk appetite upon recapture.”

The authority said it expected relevant firms to make rapid progress in addressing gaps identified against its expectations, and this will be a priority for its supervisory engagement in 2025.

Furthermore, a funded reinsurance recapture scenario will be included in this year’s Life Insurance Stress Test.

If the PRA feels that firms are not achieving the risk management practices needed to mitigate the risks funded reinsurance poses to its objectives, it will consider the further use of its powers to address those risks.

Commenting on the PRA’s publication, LCP partner and co-lead of the Insurer Financial Risk team, James Silber, said: “We welcome the PRA’s 2025 insurance supervision priorities, much of which focuses on the UK BPA insurers given the rapid growth in buy-in volumes.

“The PRA seeks to strike a balance between the need for increased capacity to meet high demand without compromising risk management in a way that weakens the protection for current and future policyholders.

“In particular, the PRA notes its continued focus on BPA insurers’ use of funded reinsurance (FundedRe), where it believes the current growth has the potential to lead to systemic risks if not properly controlled.

“The PRA set out its expectations for the use of FundedRe in July 2024 and now notes that the BPA insurers are not yet fully meeting these expectations. Some firms have individual counterparty FundedRe exposures that could see them falling below their solvency risk appetite in the event of a reinsurer default – although they would still meet their regulatory Solvency Capital Requirement.

“It is perhaps to be expected that it will take time for the BPA insurers to meet PRA expectations in full, and we are reassured that the PRA anticipates rapid progress will be made this year to address remaining gaps.

“A FundedRe stress is included in the 2025 Life Insurance Stress Test (LIST 2025) exercise that is due to be published at the end of the year. This will help the PRA to assess and compare exposures across the market.

“However, the FundedRe aspects will not be disclosed publicly at a firm level, meaning it won’t provide visibility of FundedRe exposures and sensitivities for individual BPA insurers.

“We have been calling for greater disclosure of FundedRe exposures for some time and are hopeful that the insurers will voluntarily disclose greater detail in their year-end results that will be published in March.”

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