PRA Reviews FundedRe Regulatory Treatment Amid Market and Risk Concerns

The Prudential Regulation Authority (PRA), part of the Bank of England, is currently examining the regulatory treatment of FundedRe transactions, which are increasingly used by Bulk Purchase Annuity (BPA) providers. FundedRe bundles a collateralised loan with longevity reinsurance, leading to a different regulatory approach compared to conventional annuity liability funding. This regulatory distinction has prompted the PRA to question whether the current solvency regime properly captures the risks associated with these transactions.\n\nPRA director for prudential policy Vicky White highlighted that while diversification, including geographic diversification, is valued, FundedRe transactions tend to predominantly hold non-UK assets as collateral. This practice potentially skews insurers' investment behavior away from UK productive assets towards international reinsurers, possibly conflicting with the PRA's secondary competitiveness and growth objective (SCGO). This could create an uneven competitive landscape between UK and overseas investment avenues.\n\nConcerns were raised regarding the potential for FundedRe to enable firms to underprice competitors by leveraging favorable regulatory treatment despite the associated risks. This dynamic may undermine the long-term financial strength of UK insurers and their capacity to invest, thus affecting market competition. The PRA is therefore considering whether the bundled regulatory treatment understates actual risks, leading to potentially excessive utilization of FundedRe structures.\n\nAs part of its regulatory review, the PRA is exploring several measures, including imposing explicit restrictions or limits on FundedRe transactions or revising rules to address any risk underestimation and regulatory arbitrage. However, the PRA has not made any formal decisions yet and regards this process as an initial diagnosis.\n\nEngagement with stakeholders is planned through roundtable discussions scheduled for the autumn to establish a consensus on the issue and determine appropriate changes ensuring consistent regulatory treatment of economically similar insurance structures. A key focus is the possible 'unbundling' of the investment component from the longevity reinsurance within FundedRe for more accurate risk valuation on insurers' Solvency UK balance sheets.\n\nThe PRA emphasizes that timely regulatory adjustments aim to prevent increasing unmitigated risks that could threaten the resilience and stability of the UK insurance sector and protect policyholder interests. This ongoing evaluation reflects the regulator's commitment to maintaining balanced market competition while safeguarding against financial vulnerabilities arising from innovative risk transfer arrangements.