Don’t Let MAIA Overshadow the PRA’s Quiet BPA Warning ⚠️

Whilst everyone was digesting the PRA’s new Matching Adjustment Investment Accelerator (MAIA) launched earlier in the week, another important message slipped under the radar. Buried in the PRA Business Plan 2025/26 is a stark warning about the booming Bulk Purchase Annuity market and funded reinsurance (Funded Re).

📈 BPA Market Growth & Funded Re: The BPA market is surging - £47.5bn in 2024 - and offshore “Funded Re” reinsurance deals are fuelling that growth. The PRA has flagged concerns that the rapid proliferation of Funded Re could lead to a “rapid build-up” of risks in the BPA sector if not properly controlled. In other words, what looks like a great risk-transfer solution could become a systemic risk if firms aren’t careful.

🤔 PRA Expectations vs. Reality: The regulator is clearly uneasy that firms may be chasing growth without solid risk foundations. Back in July 2024, the PRA issued Supervisory Statement 5/24 (SS5/24) outlining its expectations for insurers using Funded Re. Fast forward to now, and the PRA’s latest review found many firms still aren’t fully meeting those expectations. (Translation: the industry still has gaps in how it manages Funded Re risk.)

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• Stress Testing Funded Re: The upcoming Life Insurance Stress Test (LIST) 2025 will include a “Funded Re recapture” scenario. Firms will have to show they can withstand a scenario where their reinsurance is suddenly unwound - essentially proving that losing a Funded Re deal won’t sink their solvency. This is a clear signal that the PRA is probing the resilience of insurers’ balance sheets under extreme conditions.
• Regulatory Clampdown if Needed: The PRA warns that if insurers don’t shore up their risk management around Funded Re, it will consider “further use of its powers under FSMA 2000” to enforce the necessary standards. That could mean capital add-ons, restrictions, or other interventions for firms that fall short of expectations.

🔥 The Takeaway: The PRA’s message may have been overshadowed by MAIA’s release, but it’s loud and clear: growth at the expense of robust risk management won’t be viewed favourably. The regulator is turning up the heat on BPA writers - first with guidance, now with testing, and next (if needed) with heavy supervisory action. It’s a classic “carrot and stick” approach: MAIA may be the carrot (making investments easier), but Funded Re oversight is the stick.

💡 Advice for Insurers: Don’t wait for the PRA’s knock on the door. Now is the time to reassess your Funded Re arrangements and ensure you fully meet the expectations from SS5/24. Firms should be reviewing risk controls, exposure limits, collateral arrangements, and recapture plans for their reinsurance deals. Remember, the PRA expects “rapid progress” in closing any gaps - a strong hint that delays or half-measures won’t cut it.

✅ Get Prepared (and Seek Help if Needed): If there’s even a hint of doubt about your Funded Re compliance or stress-test readiness, now’s the time to act. This is a complex area at the intersection of actuarial, risk, and regulatory expertise. Engaging with specialists - whether internally or external consultants - can help identify weaknesses and implement robust fixes.

🔒 Bottom line: The PRA has put the insurance industry on notice. Innovative investment initiatives like MAIA are exciting, but they don’t dilute the fundamental need for sound risk management.

Feel free to reach out or connect if you’d like to discuss how to navigate these changes or bolster your firm’s Funded Re risk framework. 💬👍