The Bank of England is sounding sharper warnings on life insurers’ growing use of funded reinsurance and offshore financing.
Vicky White, director of prudential policy, used her remarks at Bank of America’s CEO conference to flag the risks, while hinting at stricter oversight in the pipeline.
Funded reinsurance packages investment and longevity risk, transferring pension liabilities to a third-party reinsurer. For insurers, the payoff is clear: less capital tied up, sharper pricing for bulk purchase annuity (BPA) deals.
Vicky White, Bank of America’s director of prudential policy
But the BoE fears something different—regulatory arbitrage. Risks stay put, capital cushions shrink, and the system absorbs more fragility than it admits.
The BPA market itself is exploding. Insurers are scooping up corporate pension obligations at pace, pushing demand for funded reinsurance to manage balance sheets.
The Prudential Regulation Authority, though, sees concentration risks brewing. White pointed to concerns echoed by the IMF, BIS, IAIS, and the BoE’s own Financial Policy Committee.
Their verdict: complexity, opacity, and cross-border deals could channel systemic risk into global insurance.
In a nutshell this is because complexity and lack of transparency in these arrangements mean they have the potential to increase the fragility of parts of the global insurance sector if the underlying vulnerabilities are not addressed.
For now, the PRA has leaned on principles. Supervisory Statement 5/24 outlines expectations around governance and risk management.
But even if firms toe the line, projections of tens of bn in new business raise questions about hidden correlations and long-term exposure. White admitted insurers are exploiting quirks in regulatory treatment to lighten capital loads, and said the bank wants to reset the framework before growth locks in bad incentives.
She also flagged another worry: offshore transactions draining capital away from UK assets that could support domestic growth, redirecting flows to overseas reinsurers instead.
This is an initial diagnosis and we have not come to any firm views, so we want to explore these issues with stakeholders. We’ll be holding roundtables later this autumn to get to a common understanding of the issue and decide if the right course of action is to change the rules to ensure a consistent treatment across economically similar structuresю
Options under review range from explicit caps on funded reinsurance structures, to rules correcting underestimated risks, to closing off arbitrage loopholes.
White called the current stance an “initial diagnosis.” Roundtables planned for autumn will test whether new rules are needed to align economically similar structures. One possibility: unbundling the investment leg of funded reinsurance from the longevity leg when valued under Solvency UK.
In parallel, the BoE built a funded reinsurance recapture scenario into its 2024 life insurance stress tests. The goal: map how far shocks could spill across insurers and into the wider economy.
Even as the regulator hardens its tone, White acknowledged insurers’ importance in long-term savings and patient investment. The message wasn’t about cutting innovation short—it was about making sure it doesn’t plant the seeds of the next crisis.
