The UK’s Prudential Regulation Authority (PRA) will introduce stress testing for insurers’ exposure to funded reinsurance (funded re) transactions for the first time in 2025. The UK regulator first signaled its concerns over the use of this type of reinsurance treaty in June 2023 when it warned this structure could leave carriers exposed in stressed markets.
Insurers are favouring funded re as it helps firms manage the market and longevity risks associated with writing bulk purchase annuity (BPA) business by reducing capital charges and therefore making PRT deals more competitive.
Unsurprisingly, given its growth and potential for capital optimisation, UK regulators have been carefully watching the increased use of funded re. In June 2023, the Prudential Regulatory Authority (PRA) sent a “Dear CRO’ letter to heads of risk at UK life insurers.
The letter outlined the regulator’s two main concerns from a sectoral review which it had carried out.
“One of the key risks arising in funded re is that firms recapture sub-optimal portfolios with depressed values and with limited ability to be transformed effectively to the firms’ preferred portfolio,” the PRA letter said.
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