UK authorities are preparing to impose stricter rules on funded reinsurance transactions, a structure widely used by life insurers to transfer liabilities to counterparties often backed by private equity, according to a report by Bloomberg.
The Bank of England is expected to move to strengthen its regulatory approach to these arrangements, amid growing concern about the increasing interconnectedness between insurers and private markets. Oversight will be led by the Prudential Regulation Authority (PRA), which has been reviewing the potential risks associated with the structures.
Funded reinsurance enables insurers to offload obligations—frequently linked to pension liabilities—while holding relatively little capital. These exposures are typically transferred to offshore reinsurers, many of which are supported by private equity capital.
Regulators have become increasingly wary of the rapid expansion of such arrangements, particularly as private equity firms deepen their involvement in both insurance ownership and the provision of private credit assets backing these transactions.
The PRA is expected to address what it sees as inconsistent regulatory treatment between funded reinsurance and alternative structures that currently attract stricter capital requirements. A formal consultation on potential rule changes is anticipated in the coming months.
Concerns centre on the potential for so-called “recapture” events, where insurers may be required to reassume liabilities if a reinsurer weakens financially. Such scenarios could increase capital pressures and force asset sales, amplifying stress across markets.
The issue has gained prominence alongside the growth of the UK pension risk transfer market, where insurers assume corporate pension obligations and subsequently reinsure portions of that risk to free up capacity for further deals.
While recent stress testing suggested that major UK insurers — including Legal & General, Standard Life and Aviva – could withstand the failure of a key counterparty, regulators have warned that vulnerabilities could build as exposures rise and transaction structures become more complex.
Globally, policymakers are also increasing scrutiny of the trend. International standard-setters and US authorities have both flagged potential risks tied to the growing role of private capital in insurance markets.
