Prudential Regulation Authority’s Proposed Changes to Funded Reinsurance
In this edition of Five Minutes with MBE, we speak to Chris Lennon, Actuarial Manager at MBE Consulting, about the Prudential Regulation Authority’s proposed changes to Funded Reinsurance, what they mean for insurers, and why regulatory change doesn’t always require organisations to rebuild their actuarial processes from scratch.
The Funded Reinsurance Reset
For those who haven’t read the consultation yet, what is the PRA actually proposing and why is it important?
The PRA is concerned that the treatment of FundedRe under Solvency UK does not adequately reflect the risks these arrangements pose to insurers/cedants. In addition, it believes the treatment is inconsistent with that of economically-similar assets.
As a result, a new approach has been proposed to determine the Counterparty Default Adjustment (CDA) on FundedRe transactions. As well as reducing the value of the reinsurance asset on insurers’ Solvency UK balance sheets, the capital held for these transactions is expected to increase to an average of 10% of the underlying liabilities.
The new CDA will be calculated similarly to Fundamental Spreads on corporate bonds – this will be based on the duration of the reinsurance cashflows, the financial strength of the reinsurer, and the characteristics of the FundedRe collateral arrangement.
These concerns and proposals are of particular importance, as the use of FundedRe in the UK continues to grow in line with the Bulk Purchase Annuities (BPA) market, which currently transacts £40-50bn annually. Of this, around 15% is ceded via FundedRe.
Beyond Capital Requirements
Most of the discussion has focused on higher capital requirements. Why do you believe organisations should also be thinking about the operational implications?
If introduced, these proposals will only apply to FundedRe deals completing after 30th September 2026. As such, operational impacts need to be considered if an insurer intends to continue to, or wishes to assess the viability of continuing to, engage in new FundedRe transactions beyond this point.
The current Solvency UK approach to FundedRe is much more principles-based than the more prescriptive proposals above, meaning there will likely be some operational overhead involved for insurers to apply this new methodology.
As we will discuss further below, these overheads are expected to be minimal, regardless of what approach insurers have taken on past FundedRe deals.
The Rebuild Myth
Many insurers immediately assume regulatory change means new systems and new models. Is that really the case here?
Over the last 10 years, regulatory updates have become synonymous with operational complexity – unsurprising, given the level of changes brought about by Solvency II and IFRS17.
However, as all good Actuaries know, correlation is not causation, and these proposals serve as proof. In the PRA’s own words, “the proposals have been designed to leverage firms’ existing calculations and analysis.”
So in this case, there is no need to build bespoke, stand-alone procedures to calculate the new CDA. If anything, insurers may find that leaning more on their existing processes serves as a catalyst to review and modernise historic operating models.
Evolution, Not Revolution
If these proposals are implemented, what practical challenges do you expect insurers to face over the next 12–18 months?
If accepted, these proposals will have an implementation date of 1st July 2027.
While insurers’ CDA calculations for FundedRe will need to be updated to comply with the new rules, the data and modelling techniques required already exist either publicly, or within insurers’ existing processes.
For instance, financial strength ratings for reinsurers are published regularly, and are likely already monitored by insurers. Further, applying the CDA is akin to applying the Matching Adjustment to annuity cashflows, which BPA insurers will already have processes in place for.
Given the increased materiality of the CDA under these proposals, it is likely to come under increased scrutiny from stakeholders. Insurers will therefore have to consider whether any additional Reporting & MI might be required.
Prepare, Don’t Panic
For insurers planning future BPA transactions, what should they be doing now to prepare?
Insurers will firstly be keen to quantify the impact of these changes on the balance sheet and solvency positions of new BPA transactions, if they were to continue with their current FundedRe strategy.
BPA insurers can then compare and contrast this with the effects of other risk management and investment opportunities, including alternative reinsurance structures and more direct investments.
If following this assessment, an insurer decides they may continue to use FundedRe for future BPA deals, then their Pricing assumptions will need to be revised to reflect the increased capital requirements of FundedRe.
As well as the operational considerations outlined above, insurers should also review their current pipeline of BPA transactions, to determine which deals would be likely to fall in or out-of-scope of the proposed changes. In some cases, they may choose to accelerate a deal timeline and utilise FundedRe under the current Solvency UK rules.
That being said, the PRA itself has stated that it “expects the volume of new funded reinsurance arrangements to be transacted before 30th September 2026 to be consistent with firms’ existing plans”.
Final Thoughts
If there’s one message you’d like insurers to take away from your article, what would it be?
By design, the PRA’s proposed changes to the treatment of FundedRe should not require BPA insurers to build new processes from the ground up. However, it does present an opportunity to re-assess and enhance existing systems which will now be more heavily relied upon.
MBE Consulting helps insurers implement regulatory change by building on existing actuarial capabilities — not by creating unnecessary complexity.
Whether you’re assessing the impact of the PRA’s proposed Funded Reinsurance changes, reviewing your actuarial operating model or looking to leverage your existing models and processes more effectively, the MBE Consulting team can help.
5 Minutes With is a new MBE Consulting content series sharing practical perspectives from our people on the issues shaping insurance, actuarial, finance and transformation teams.
