BPA market: a key PRA priority for 2025

The Prudential Regulation Authority ("PRA") has set out its 2025 expectations for UK insurers, by way of a Dear CEO Letter.  The areas are not exhaustive but do represent "thematic priorities". The themes will not come as a surprise to the industry and, on a high level, are more a continuation and development of ongoing priorities.   The objectives are consistent with the PRA's primary aim of protecting, and providing security to, policyholders. The PRA’s expectations with respect to the BPA market will be of interest too to defined benefit pension scheme sponsors and trustees.

The priorities are:

1.  Evolution in the insurance industry

• Solvency UK implementation and other policy reforms
• BPA market developments, including funded reinsurance
• Cyclicality in the general insurance market

2.  Evaluating and maintaining resilience

• Life Insurance Stress Test ("LIST") exercise in 2025
• Liquidity resilience
• Solvent exit planning for insurers

The BPA market is therefore squarely within the PRA's 2025 priorities.  Regulatory focus is ultimately due to a booming BPA market that is continuing to grow at a very fast pace. This is seeing structural variations, evolutions and refinements of the BPA product to meet increasing demand. Such developments include longer price locks, rights for trustees to terminate and non-cash premiums.

The PRA notes: "[t]hese features can bring additional sensitivities to a firm’s balance sheet, and they may require firms to implement new risk management approaches or limit their exposure to such features. We expect firms to ensure that their risk management and control frameworks keep pace with changes in business practice and with evolving transaction features." More widely, the PRA expects insurers to: "proactively manage in a prudent manner their capacity to support growth in this business, and to ensure that high levels of competition for BPA business do not weaken firms’ pricing discipline and incentivise weaker risk management standards."

The PRA's focus on insurers' use of funded reinsurance will continue as a core aspect of these expectations. While funded reinsurance is not new to the industry, the PRA remains concerned that the current increase in its usage could ultimately lead to systemic risks, absent appropriate controls.  The PRA notes that it is evident from insurers' self-assessments that there is not yet full compliance with the expectations the PRA set out last July in the supervisory statement (“SS”) 5/24 (a link to which is here: SS5/24 – Funded reinsurance | Bank of England). The PRA points to insurers' aggregate exposure internal investment limits and single name exposure limits as examples of where further work will be required. Given the relatively short period of time since this SS, it is unsurprising that there remain certain gaps, but the PRA expects the relevant insurers with those gaps to "make rapid progress in addressing" them this year. The funded reinsurance recapture scenario – addressing the event in which the funded reinsurance agreement terminates and the assets need to be recaptured from the reinsurer – will also form part of the 2025 LIST exercise, which focusses on the level of financial resilience of the largest UK life insurers.

For any further information, including the wider list of PRA priorities referred to above, please contact Tom MacAulay, partner in our Global Insurance Industry Group, Jay Doraisamy and Andrew Block, co-heads of our London Pensions Group, or your usual contact.