Big Impacts, High Leverage
Introduction
In April 2026, the Prudential Regulation Authority (PRA) published a consultation paper on proposed changes to the Solvency UK treatment of Funded Reinsurance (FundedRe).
Much has been written about how the proposals would significantly impact the capital positions of these transactions, whose volumes are increasing within the Bulk Purchase Annuity (BPA) market, and the need for insurers to consider alternative risk management strategies.
This article delves deeper to consider the operational implications of the proposals. For insurers continuing to use FundedRe, there are numerous opportunities to leverage existing models and processes. No stand-alone processes need to be built, and any changes required should not be a burden for BPA writers.
Why Is the PRA Proposing These Changes?
One of the PRA’s key concerns with the current treatment of FundedRe under Solvency UK is that it does not adequately reflect the underlying risks—particularly the counterparty default risk posed by reinsurers.
In addition, the current treatment is considered inconsistent with economically similar assets, such as directly held corporate bonds.
Another concern is that the existing framework is principles-based, which can lead to inconsistencies in how capital is calculated across the industry. As a result, the PRA is proposing a move towards a more prescriptive, rules-based approach.
What Are the Proposed Changes?
Alongside introducing a formal definition of Funded Reinsurance into the PRA Rulebook, the consultation proposes a new methodology for calculating the Counterparty Default Adjustment (CDA).
The CDA measures the expected losses should a reinsurer default and reduces the value of the reinsurance asset on an insurer’s Solvency UK balance sheet.
Under the proposal, the CDA would equal the Fundamental Spread for corporate bonds that match the reinsurance cashflows in both:
- Maturity / duration
- Credit Quality Step (CQS)
Expected Market Impact
For an average BPA FundedRe transaction, the PRA estimates:
- Around a 7% reduction in Solvency UK balance sheet value.
- Capital requirements increasing from 2–4% of underlying annuity liabilities to approximately 10%.
As these proposals are intended to apply to transactions occurring after 30 September 2026, some insurers may choose to accelerate planned transactions.
More broadly, as BPA insurers reassess their capital management strategies and investigate alternatives to FundedRe, it is reasonable to expect that FundedRe volumes within the UK BPA market could decline should the proposals be implemented.
What Does This Mean for Existing Processes and Models?
The PRA itself notes that:
“Implementation costs are expected to be low…the proposals have been designed to leverage firms’ existing calculations and analysis.”
Industry-wide implementation costs are estimated to remain below £500,000 annually (annualised over ten years), assuming current FundedRe volumes continue.
Rather than building entirely new processes, insurers can leverage existing capabilities across several operational areas.
Where Existing Capabilities Can Be Leveraged
Monitoring Reinsurer IFS Ratings
This information is already readily available and is likely already monitored by BPA insurers as part of their existing risk management framework.
Calculating Reinsurance Cashflow Duration
Existing cashflow and asset management models can already determine the maturity and duration of reinsurance cashflows.
Assessing CQS Upward Notches
The applicable upward notches can generally be determined directly from the FundedRe contract and are unlikely to change over time.
Adequacy & Matching Adjustment Eligibility
These depend on how collateral is defined within the FundedRe agreement. Insurers and reinsurers typically agree on the collateral strategy in advance to balance investment returns against eligibility for upward notches.
Credit Enhancement
This notch is unlikely to be widely used, as reinsurers generally already possess strong IFS ratings and therefore have limited incentive to hold lower-return assets purely to improve their rating.
Extracting Fundamental Spreads
Most BPA insurers already have processes to extract and monitor Fundamental Spreads for Matching Adjustment calculations.
These same processes can be readily reused for the proposed CDA calculation.
Applying the CDA
The CDA effectively acts as an adjustment to the discount rate applied when valuing reinsurance cashflows.
This methodology already exists within insurer valuation models through the application of the Matching Adjustment to annuity cashflow discount rates, making it straightforward to extend for FundedRe.
Assumptions Management
Existing assumptions management solutions require only minimal extensions to capture:
- Reinsurer IFS Rating
- Which of the three upward notches apply
- The Fundamental Spread relevant to each FundedRe transaction
Reporting & Management Information
Most BPA insurers already monitor the existing CDA for FundedRe transactions.
Current reporting processes will require only minor updates to reference the revised calculations.
Given the expected increase in materiality, organisations may also wish to introduce more granular reporting to satisfy internal and regulatory stakeholder requirements.
Preparing, Not Panicking
By design, the PRA’s proposed changes to FundedRe treatment under Solvency UK should not be onerous for BPA insurers to implement.
For organisations that already have mature actuarial models, asset management processes and assumptions governance in place, the opportunity is not to build new systems—but to make better use of existing ones.
The proposals may introduce additional capital requirements, but operationally they present an opportunity to streamline existing capabilities rather than create unnecessary complexity.
How MBE Consulting Can Help
Whether you’re assessing the operational impact of the PRA’s proposals, planning for post-September 2026 transactions, or considering how existing actuarial processes can be leveraged more effectively, MBE Consulting can help.
By building on your current operating model, rather than creating new standalone processes. We help insurers implement regulatory change efficiently, pragmatically and with minimal disruption.
Get in touch to discuss how your organisation can prepare for the proposed changes while strengthening its actuarial operating model.
