DP2/25 – Alternative Life Capital: Supporting innovation in the life insurance sector

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Executive summary

The Prudential Regulation Authority (PRA) is committed to supporting sustainable growth in the UK economy. A thriving and innovative UK life insurance sector has a vital role to play in that aim. While the sector remains robust, feedback from market participants suggests that traditional sources of capital, such as listed equity and debt, are becoming less accessible or less attractive for some firms. This is particularly relevant for public listed insurers and mutuals, which can face constraints in raising new capital.

This discussion paper (DP) sets out the PRA’s initial thinking and invites feedback on potential policy changes that could allow life insurers to transfer defined tranches of risk to the capital markets. The PRA is open to a range of innovative structures – including potential reforms to the Insurance Special Purpose Vehicle (ISPV) framework or approaches used successfully in other markets such as banking.

Transferring insurance risk to capital markets is not a new concept, as general insurance (GI) firms have long made use of transformer vehicles for this purpose. Similarly, banks use Significant Risk Transfers (SRTs) to transfer the credit risk on a portfolio of assets to third party investors.

However, where used by GI firms, the approach is similar to someone (investors in this example) putting cash in an envelope on the mantlepiece in case of a rainy day. The cash is readily available, carries limited risks and the arrangement is simple. To the GI firm, such an arrangement gives close to £1 of regulatory capital reduction for every £1 of cash held in the theoretical envelope – reflecting the extremely high level of security of fully funded ISPVs. This is well suited to short term, clearly defined risks, but life insurance policies can remain in force for 40 years or more and may require a different model.

The DP outlines some of the options that could be used to bring increased funding flexibility and seeks views on their feasibility and attractiveness, as well as how any potential risks and supervisory considerations could be effectively managed. The PRA is not proposing specific policy changes at this stage. Instead, we are seeking evidence and perspectives from a wide range of stakeholders on the need for capital, the nature and characteristics such capital should have and the structures that could enable better access to capital. Furthermore, it seeks views on how the PRA and firms should manage the risks that increased flexibility in capital funding could give rise to.

The PRA’s overriding aim with this initiative is to work collaboratively with the industry to identify potential changes to the existing insurance regulatory framework to facilitate and attract new forms of capital, support UK economic growth, and maintain strong protection for policyholders.

1: Introduction

1.1 This Prudential Regulation Authority (PRA) discussion paper (DP) aims to gather feedback on facilitating life insurers’ access to alternative forms of capital that do not stem from direct issuance equity or debt. The purpose of such capital would be to enable patient investment and support the life sector while preserving policyholder protection.

1.2 While it is not the PRA’s role to direct market innovation and propose new solutions or structures, the PRA is interested in understanding where there are regulatory barriers to capital entering the sector and whether removing those barriers could advance its primary and secondary objectives.

1.3 The PRA considers that access to third party capital could help life insurers in several ways. It could be used to provide additional capacity, to manage firms’ risk profiles or to enable product innovation. It could also support growth in the UK’s economy by allowing for a greater focus on long term investment.

1.4 There are established procedures for firms to access capital from traditional debt and equity markets. This DP focuses on alternative approaches for firms to access third party capital, without expressing a preference for any specific approach.

Background

1.5 His Majesty’s Treasury (HMT) has recently consulted on changes to the Risk Transformation Regulations (RTR). Changes to those regulations would be relevant for one potential approach to alternative life capital, namely insurance special purpose vehicles (ISPVs). ISPVs are entities through which insurers can transfer insurance risk to the capital markets. The UK has existing legal and regulatory frameworks which facilitate this activity. Looking beyond ISPVs, there are other approaches used domestically and in international markets which could also widen firms’ access to capital. Firms may also have other potential structures in mind, and the PRA welcomes feedback on those.

1.6 Widening firms’ access to external capital would come with trade-offs. The current UK ISPV regime adopts a lighter touch for ongoing supervision, focusing instead on the authorisation requirements at the outset. This approach works well for general insurance (GI) business, where claims are typically short-term, the legal structures are straightforward, and the assets held are low risk.

1.7 When considering the transfer of risks stemming from longer-term insurance liabilities, or those backed by more complex asset portfolios, the fundamental regulatory questions become much more challenging to answer. The main ones are: (a) how much regulatory credit can be safely granted for the risk transfer; (b) will the necessary funds be available when claims arise; and (c) will the process for determining and paying claims remain clear and fair to all parties involved?

1.8 In part because of the complexity of these issues, the PRA’s position, set out in policy statement (PS) 9/25 – Changes to the UK ISPV regulatory framework, has been that there are significant challenges in using ISPVs for annuity and similar business under the current regime. The PRA’s new approach to policymaking as set out in PS3/25 – The Prudential Regulation Authority’s approach to policy, and HMT’s RTR consultation provides an opportunity to reassess this view.

Discussion paper structure

1.9 This DP is structured around three main themes:

• Chapter 2 considers the various needs for capital in the UK life insurance sector. It considers the obstacles to firms’ accessing this capital and what the use cases could be.
• Chapter 3 focuses on approaches to access third party capital that firms have explored or that the PRA has observed domestically as well as internationally. It considers what the relative advantages and disadvantages of such approaches are.
• Chapters 4–6 look at how an increase in flexibility in the ability of UK insurers to access capital through alternative life capital structures is likely to pose challenges to the PRA’s objectives and how might they be mitigated.

1.10 This DP seeks views and evidence from stakeholders on the themes above which will help to inform the PRA’s future work, including the policy design and cost benefit analysis, planned for 2026, alongside additional work by HMT.

Responses and next steps

1.11 This DP closes on Friday 6 February 2026. The PRA invites feedback on the topics discussed in this DP. Please address any comments or enquiries to DP2_25@bankofengland.co.uk.

2: Identifying the need for capital in the UK life insurance sector

The current state of the life insurance sector

2.1 The UK life insurance sector has over £2 trillion of assets, of which nearly £880 billion relate to non-linked insurance products. Significant amounts of the non-linked assets back liabilities associated with annuities (c£350 billion) and with-profit funds (c£200 billion). At the end of 2024, the industry was supported by c£100 billion of shareholder capital and had an average solvency coverage ratio of c190%. The solvency coverage ratio of the industry has increased significantly following the rise in interest rates since 2022.

2.2 The UK annuities sector has seen a rapid growth in the last few years. Bulk Purchase Annuities (BPA), where life insurers take over the risks of private sector defined benefits pension schemes, has accounted for recent transfer activity of more than £40 billion per annum to the life insurance sector, and industry observers predict transfer of more than £500 billion over the coming decade. Similarly, the sale of individual annuities increased to £9 billion in 2024, from an average of c£5 billion in 2020 to 2023.

2.3 Some areas of the life insurance sector are clearly attractive to capital providers. The UK life sector has issued c£16 billion in debt capital over the last five years, attracting widespread interest. Similarly, the bulk annuities market saw the number of participants grow from seven in 2014 to eleven in 2025. At the same time, the industry continues to innovate through strategic partnerships with international investors.

Understanding the constraints

2.4 Consistent with the data above, the PRA has not identified, through discussions with market participants, a systemic shortfall in capital available to support the UK life industry. However, the PRA considers that there may be some evidence of pinch points in the way UK life insurers access capital, and the cost of that capital. Potential examples of this are:

2.5 Equity market access

• Limited recent history of equity rights issues: The UK listed life insurance groups have not raised significant amounts of cash in the equity market for a considerable period and, from discussion with market participants, the PRA has identified limited appetite for such a path to accessing capital.
• High public equity cost of capital: Four of the 12 highest dividend yields in the FTSE 100 are listed life insurers suggesting that their equity cost of capital is relatively high.

2.6 Strategic shifts in business models

• A pivot to capital-light business models: In their annual reports, several firms have emphasised that their strategies are to pivot to capital light business models, that is, an increased proportion of products where the insurer takes limited risks. This usually involves savings products for which policyholders assume the investment risks or which provide no guarantee or protection for life events.
• Simplification of international businesses: Many UK insurers have also chosen to simplify their businesses by divesting international life businesses.

2.7 Using external capital

• An increased appetite for reinsurance: Reinsurance is forming an increasingly important part of some firms’ business models. This is sometimes driven by a cost of capital advantage or for ease of access (including features like speed and flexibility).
• Appetite for joint ventures and partnerships: Over the last few years, there has also been an increased interest in international strategic partnerships, with the partner providing capital and/or investment capabilities.

2.8 The above can be a natural part of commercial market developments and customer demand. However, they could also be indicators of firms seeking more, or a different form of, capital for specific product lines.

Nature of capital

2.9 Beyond the question of quantum of capital, there is an additional aspect worth considering: patience. The examples listed above could be symptoms of a misalignment between insurer and investor time horizons, rather than simply an unwillingness to invest on behalf of investors.

2.10 Defining what constitutes patient capital can be difficult; however, the PRA expects that it would contain at least some of the features listed below:

• It is invested in line with the long-term nature of insurers’ liabilities and focuses on a similar time horizon.
• The investor is willing to forgo an immediate return in anticipation of more substantial returns over time.
• It also allows higher yielding UK productive investments to be developed over time, rather than seeking assets already originated by others in global markets.
• It reinvests in growth and avoids a concentration of counterparty risks.

2.11 Some market observers note that public market investors ideally want returns on the capital they provide to be as smooth as possible. Some of the volatility that is due to unrealised gains and losses, which is disclosed on a regular basis through public disclosure, may not appeal to such investors, even though an appetite to commit long term capital to the sector may be present. Providers of patient capital may be willing to look-through these temporary unrealised gains and losses and focus on the long-term returns.

2.12 The PRA understands that these features are not unique to a specific investor class and would like to understand how investor appetite interacts with UK life insurance business models. For example, some product strategies may not be within the appetite of equity shareholders but may be attractive to alternative capital providers.

Q1: Are there areas of your business where growth is capital constrained? If so, what are those areas and why is it difficult to attract capital to support those lines of business?

Q2: How would an increase in the flexibility of access to capital affect your business and product strategy? What would be the primary benefit of additional avenues to access capital for your firm: cheaper access to capital, or more flexible access to capital?

Q3: As investors or capital providers in the life insurance sectors, what are the challenges you face when investing in the UK life insurance sector? What features should the alternative avenues possess to be attractive to the investor community? Does short-term volatility in returns act as a deterrent to further deployment of capital in the UK life insurance sector?

Q4: Are there other areas where alternative life capital could be beneficial to firms, policyholders and the economy?

Q5: How might increase flexibility in the use of alternative life capital affect the UK life insurance sector, including the structure, activity, and pricing of life insurance products? 

Q6: Could more capital flexibility allow for more patient asset deployment and therefore result in more investment in UK productive assets by UK life insurers?

3: Risk transformation examples

Insurance Linked Securities and the UK ISPV market

3.1 The Insurance Linked Securities (ILS) market has become an important source of capacity for GI firms. Investors pay in capital to a special purpose vehicle (SPV) which has accepted specific risks from a primary insurer or reinsurer, effectively providing protection to the cedant. In the UK, the SPVs that carry out insurance transformations are authorised and regulated by the PRA and are known as ISPVs.

Diagram 1: Example structure of an ILS/ISPV transaction

3.2 In essence ISPVs allow capital markets to support cedants by transforming insurance risk into capital market instruments. A high-level view of the mechanics is given below:

• Risk transfer: A primary insurer or reinsurer (the ‘cedant’) cedes a portion of its insurance risk to an ISPV. This usually takes the form of a reinsurance contract.
• ISPV transformation: The ISPV issues securities to investors and the proceeds from the sale of those securities are used to fund the ISPV and cover potential claims related to the transferred risk.
• Investor returns and subordination: Investors receive payments from the ISPV for the protection granted to the cedant. These are however subordinated to any claims by the cedant, should an insurance risk crystallise. The level of claim payout will depend on the severity of the incurred risk.

3.3 The form of the ILS can have a great deal of flexibility. A commonly used example is a catastrophe bond (‘Cat bond’), where the SPV raises funds up-front from investors to cover the losses that may arise from a natural catastrophe such as a windstorm or hurricane. These are often low probability but high impact events that the primary insurer or reinsurer prefers to limit their exposure to.

Banking Significant / Synthetic Risk Transfers (SRTs)

3.4 SRTs have been used in banking since the 1990’s. They allow banks to transfer credit risk to a third-party investor while retaining control of the underlying exposure. The credit risk is transferred through securitisation structures such as the issuance of credit linked notes. This process allows a bank to manage its risk exposure including reducing credit risk concentrations and its regulatory capital requirement on the covered exposures. The freed-up capital can be used to support new lending and improve its capital efficiency.

3.5 In a typical funded synthetic SRT structure, a protection seller (ie credit protection provider) will reimburse losses realised as a result of credit events that occur in the loan portfolio, such as bankruptcy, failure to pay, and restructuring. When a loan in the portfolio experiences a credit event in accordance with the pre-set conditions, the bank notifies the investor and claims the loss protection. The protected tranche is reduced by the amount of the realised loss, effectively transferring the loss to the investors. The bank continues to pay credit protection premiums to the investor. These premiums are based on the smaller protected notional balance of the remaining portfolio which is still under credit protection.

3.6 Depending on the underlying asset, the time needed to determine a loan’s final loss can range from months to years. As a result, most SRT structures incorporate a two-stage loss calculation and payment process. The initial loss is based on an estimate and claimed at the time of credit event notice and the final loss is claimed after a loan work out. If the final loss differs from the initial loss, there is an adjustment payment based on the difference and can go in either direction (ie, from the investor to the bank or the bank to the investor) depending on the difference between the initial and final losses.

3.7 A schematic outlining how an example of SRT can work is shown below.

Diagram 2: Example of funded SRT structure

Life insurance sidecars and joint ventures

3.8 Over the last decade, the PRA has also witnessed the growth of alternative structures, including joint ventures and strategic partnerships to enable firms to access outside capital and expertise. In some instances, this involves the third party taking a strategic stake in the company or in a subset of the company.

3.9 While this approach is more prevalent internationally, it has also been observed in the UK domestic market. It often involves leveraging the UK insurer’s existing investment and modelling capabilities (eg, matching adjustment and internal model permissions), combined with third party capital.

3.10 Looking more widely, a further development is that of life insurance sidecars. The International Association of Insurance Supervisors (IAIS) issues paper on the Structural Shift in the Life Insurance sector notes the following:

The reinsurer may also cede to a reinsurance sidecar, which is a vehicle utilised to raise third-party capital to support insurance liabilities. The sponsoring (re)insurer retrocedes part or all of the risk in AIR [Asset Intensive Reinsurance] transactions and uses third-party capital (often international investor capital) to provide the risk capital necessary. This effectively transfers the risks and benefits of the block of assets and insurance liabilities to third-party investors. Sidecars are designed to be long-term in nature to match the underlying liabilities.

3.11 While such life reinsurance sidecars are not currently a feature of the UK life insurance market, they could provide an alternative vehicle for UK life insurers to access external capital providers. The PRA is interested in views on these approaches and structures.

3.12 The PRA is aware that the list of structures presented above is not exhaustive, and other approaches have been used. The PRA does not have a specific preference for any of the options but would like to understand the challenges that investors or insurers have faced when trying to structure them.

Q7: Are there any specific features of the structures described in this chapter that would be appealing to your business?

Q8: Are you aware of any other vehicles that have been used to access capital in other markets?

Q9: What is your view of the regulatory barriers to bringing in external capital to support a particular line of insurance business?

Q10: When deciding to access external capital, what are your key decision criteria?

Q11: Part of the reason for the success of SPVs in the GI market is that they allow investors to carve out specific risks that are uncorrelated to wider financial markets and with capped exposure. Is there investor appetite for exposure to life insurance risks, even if those risks may not be as uncorrelated to wider financial markets?

4: Striking a balance between cedants and capital providers

Capital provider considerations

4.1 For any alternative life capital structure to be viable and attractive to both parties, it would need to balance the demands of investors and the requirements of cedants and their policyholders. Some potential considerations that will need to be negotiated include:

• Funding levels: The quantum of assets the vehicle is required to hold to cover risks associated with life insurance contracts would likely need to be capped by the contractual agreement, rather than by the maximum exposure of the underlying insurance contract, as it is often impossible to determine a maximum exposure for such contracts.
• Nature of funding: Whereas traditionally the assets of transformer vehicles are typically invested in risk-free assets, this may not be appropriate for life exposures. Indeed, fixed income assets could provide a better match to the underlying liabilities, providing some element of asset-liability management.
• Funding duration: While the life insurance liabilities may run on for decades, the providers of capital may be unwilling to support the vehicle for more than eg ten years, which creates a mismatch, although this is not unlike debt capital that life insurers already use.
• Asset exposure: The funding could be invested in return-seeking assets, with those returns impacting the calculation of the vehicle’s exposure; however, this would result in market and credit risks.
• Protection for reserve deterioration: While alternative capital in the GI sector has largely been focused on providing protection for claims incurred, alternative capital for the life sector is likely to be focused on reserve deterioration. The reason for this is that the capital is likely to be provided for a shorter time period than the duration of the underlying life insurance contract. Life insurance risks could also be much more correlated with wider financial market performance.

Risks to cedants

4.2 The structuring decisions described in the previous section are complex, and would generate some residual risks for the ceding insurer which would need to be considered for prudential purposes. Below are some examples of the types of risk that could emerge.

• Confidence on capital relief: Life insurance products written by insurers and assets that insurers invest in are inherently complex. Valuing the insurance technical provisions and the capital requirements requires detailed modelling, often via an internal model that uses bespoke methodologies. Moreover, the capital requirements under Solvency UK take a 1-year Value-at-Risk (VAR) view. As a result, the cedant will have to determine the amount of capital relief that they are able to claim based on the nature of the structure. This may be a complex judgement which exposes the cedant to risks in stress if it overestimates the capital relief it can claim.
• Maturity mismatch risks: Where a funding vehicle is used, there is a risk that the capital is only available for a fixed period which is not aligned with the duration of the cedant’s underlying liabilities. Indeed, pension liabilities can last for decades, and the associated risks can deteriorate at any point over the lifetime of the contract. Equally, the capital needed to support the risks may fall over time as the liabilities run-off. Care would be needed when the cedant recognises any capital relief.
• Complexity: The inclusion of complex structural features, such as excess spread, voluntary termination and over-hedging could introduce further risks to measurement and monitoring, and could undermine the safety of the ceding insurer.
• Model risks: The transfer of risks from an insurer to the capital markets would likely involve the use of simplification and reliance on a mark-to-model approach agreed between the counterparties. This could generate basis risk, ie the risk that the cover provided does not exactly match the risks on the underlying liabilities to which the cedant is exposed.
• Control: Clearly, there will be a need for the cedant to continue to manage the risks. However, investors will look to have some controls in place on the activities of the cedant. It is therefore important that such controls do not impede on the cedant’s processes and governance, and its responsibilities to its policyholders.

Macroprudential/systemic risks

4.3 Extensive use of alternative life capital flexibilities could also give rise to broader sector-wide considerations:

• Originate to distribute risks: Firms might relax underwriting standards as they retain insufficient share of the business and instead operate on the expectation that they will be able to transfer the risk to the wider market.
• Arbitrage risk: There is a risk that the standards are not consistent between the different structures in the market, generating an arbitrage opportunity. This could result in a reduction in the amount or quality of capital supporting the entire UK life insurance sector.
• Risks of rapid pullback from investors: If there is a mismatch between duration of the funding vehicle and the underlying risk then insurers could build up reliance on rolling capital positions, which could become too costly to execute in stress.

Q12: What do you consider to be the key risks as a result of enabling greater flexibility in access to capital for life insurance business and how might they be mitigated?

5: Authorisation and supervisory safeguards

5.1 The PRA operates different supervisory approaches for entities engaged in risk transfer depending on the counterparty. In contrast to UK insurers and reinsurers, the UK ISPV regime adopts a lighter touch for ongoing supervision, with more weight instead placed on the authorisation requirements at outset. This approach works well for GI business, where claims are typically short-term, the legal structures are straightforward, and the assets held are low risk. In these cases, the amount of any claim on the UK ISPV is usually clear and not subject to multiple, complex assumptions by different parties, making the process transparent and predictable.

5.2 When considering the transfer of risks stemming from longer-term liabilities or those backed by more complex asset portfolios, it is not clear that the current ISPV approach would provide an appropriate and workable solution. Indeed, given the complexity of the arrangements, the dynamic-nature of the risks, the duration of the contracts and the impact on the cedant’s long-term capital position, a different form of authorisation and supervision may be required.

5.3 The PRA is therefore interested in views on what sort of supervision and authorisation models might be appropriate for alternative life capital funding structures.

5.4 One possible approach would be for the PRA to focus on the cedant’s recognition of the risk mitigation effect rather than the exact structure of the vehicle or arrangement. While a certain level of transaction (or vehicle) supervisory permission would be necessary, more focus could be placed on the cedant’s continued responsibility to demonstrate to the PRA that the capital relief assumed adequately captures the economic substance of the transfer.

5.5 In the UK prior to the introduction of Solvency II, the Prudential Sourcebook for Insurers (INSPRU) included an overarching ‘risk transfer principle’, under which a firm was only able to take credit for reinsurance if and to the extent that there was an effective transfer of risk from the firm to a third party. The scope of that principle applied more widely than reinsurance and included all types of risk transfer (including to ISPVs). A similar approach is used for SRTs in banking.

5.6 The cedant will also have responsibility for determining an appropriate valuation approach for the recognition of the risk transfer in its base balance sheet, given some of the mismatches highlighted in chapter 4. Even for an over-collateralised risk transformation vehicle, there would be uncertainty around future outcomes over long time horizons, and there would be potential for the extent of any risk transfer to vary depending on asset returns. This dynamicity and mismatches will need to be considered by the cedant. Accordingly, the PRA is interested in views on the approach to valuation of recoverables from such vehicles. In particular, a deterministic approach may not adequately capture the risk profile, and a probabilistic methodology may be more reliable. Life insurers have experience in valuing similar contingent exposures (eg, calculating the cost of burn-through for with-profits funds).

Q13: Do you have any views on how the PRA should balance ease of authorisation against the intensity of ongoing supervision for alternative life capital funding structures?

Q14: Do you have any views on potential approaches for valuing risk transfer associated with alternative life capital funding structures?

6: Alternative life capital principles

6.1 An important consideration underlying all these principles is that the amount of credit that cedants claim from such transactions should be commensurate with the level of certainty that the transformation will perform as anticipated. In particular, should a claim on the alternative life capital structure arise, the cedant needs to be confident that the claim will be paid-up to a known defined limit and settled quickly.

Principle 1: The quality and quantity of capital required to support insurance risks should not be lowered through the use of alternative life capital structures.

6.2 Any structure or arrangement should not be used to undermine or arbitrage other parts of the prudential framework for UK life insurers, including the requirements of the matching adjustment. In particular, any structure should only result in a change in the sources of capital, not a deterioration of the amount and quality of capital held to support insurance liabilities.

6.3 Moreover, the funding mechanism, that is the structure of any notes issued to investors, should not be of lower quality than the own funds instruments available for issuance by UK life insurers.

Principle 2: The risk transferred to the capital markets through alternative life capital structures should be contractually-bounded and time-limited.

6.4 Life reinsurance is often considered a complete risk transfer as cover remains in place throughout the duration of the underlying insurance contract regardless of how adverse the outcome may be or how long the contract lasts. Longevity reinsurance, for example, often does not have a claim cap or detachment point. Instead, reinsurance relies on the reinsurer remaining viable throughout the duration of the contract and being able to re-capitalise itself should it need to. Such an assumption of re-capitalisation cannot be extended to alternative life capital structures. As such, covers from such structures will need to be time-limited and contractually-bound (eg, through a detachment point) to remove any expectation of a future need of re-capitalisation.

6.5 Only through such limits could a cedant be confident that the structure is sufficiently funded at the outset and at all times. Clarity in the definition of the risk transfer on these two elements will provide certainty as to the extent and the duration of the risk transfer, to allow the cedant to manage its exposure and make sure the structure is adequately funded. These structures should not depend on the structure having to recapitalise itself in the future.

Principle 3: Cedants will need to manage tail and residual risks resulting from their use of alternative life capital structures.

6.6 Following on Principle 2, limiting the cover provided by the alternative life capital structures would require the cedant to put in place adequate safeguards to manage tail and residual risks. Arrangements that cover up to a 1-in-200 level or a ten-year protection on a thirty-year underlying insurance risk may not readily qualify as a full risk transfer on its own and hence could be insufficient to allow the cedant to claim full capital relief. Similarly, should the funding cover a 1-in-10 to a 1-in-300 stress scenario, the insurer would have to manage the risks outside that range as part of its own risk management processes.

6.7 The use of any alternative life capital structures should not generate material gaps, even if the probability is low, that result in underfunding or mismatches between the risks and the funding available. UK life insurance products can be very long in duration, requiring capital to be set aside over multiple decades.

6.8 The PRA recognises that this is not a new challenge as traditional capital can come in various forms, including debt capital which is already time-limited and often refinanced. The approaches to the management of time-limited capital structures could be leveraged for alternative life capital structures.

Principle 4: Alternative life capital structures should predominantly result in capital relief, not balance sheet financing.

6.9 The UK regulatory framework for long-term life insurance is highly tailored to the characteristics of UK insurance liabilities. For example, recognising as it does the future profits that can be earned with a hold to maturity strategy based on the close matching of asset and annuity liability cash flows. Replicating such arrangements for alternative life capital structures would be impractical and might lead to regulatory arbitrage opportunities if only done approximately. Moreover, those structures have not been developed to house entire company balance sheets as this remains the core operations of an insurance or reinsurance entity. It would therefore be inappropriate for such structures to be used to house a whole balance sheet or all the asset backing the best estimate liabilities.

6.10 Using a reinsurance arrangement will generally result in capital relief for the cedant, commensurate with the capital provided in the vehicle. In some instances, it can also result in a day one reinsurance recoverable asset, covering some of an insurer’s technical provisions. This can act as a form of balance sheet funding, where one of the assets supporting a cedant’s insurance liabilities at inception is the amounts recoverable from the reinsurance counterparty.

6.11 Alternative life capital structures could have a similar effect on an insurer’s balance sheet, but that should not be the central aim. The primary impact should be a reduction in regulatory capital requirements, justified by a commensurate transfer of risk to third parties. This could help control a cedant’s exposure to the capital provider and limit the potential for the assets of the vehicle to be managed in a manner that is not aligned with the UK Solvency II regulatory framework.

Principle 5: A level of risk retention by the insurer is necessary in any such structures and the UK insurer should only make limited use of alternative life capital structures.

6.12 The UK life insurer should meet a level of risk retention to better align its incentives with those of external investors and reduce the risk that information asymmetries are exploited. Similarly, the UK life insurer should only use such arrangements for a limited portion of their risks and balance sheet. Alternative life capital structures should not be developed to allow a firm to originate and then distribute all the UK life insurance risks it underwrites.

Principle 6: The alternative life capital structures should not alter the control a UK cedant has over the management of its business.

6.13 Through the use of alternative life capital structures, the UK cedant should retain full control of the key operations of its business, including key investment decisions and determination of surplus that could be extracted by investors. Moreover, the management of the risks and the commitment to pay claims to policyholders should continue to be considered as part of the governance and control infrastructure of the UK cedant, as if the risks had not been ceded to external investors.

Q15: Do you have views on the principles that are set out in this chapter? Are there others that should be considered?

7: Questions

Firm and investor motivations

Q1: Are there areas of your business where growth is capital constrained? If so, what are those areas and why is it difficult to attract capital to support those lines of business?

Q2: How would an increase in the flexibility of access to capital affect your business and product strategy? What would be the primary benefit of additional avenues to access capital for your firm: cheaper access to capital, or more flexible access to capital?

Q3: As investors or capital providers in the life insurance sectors, what are the challenges you face when investing in the UK life insurance sector? What features should the alternative avenues possess to be attractive to the investor community? Does short-term volatility in returns act as a deterrent to further deployment of capital in the UK life insurance sector?

Q4: Are there other areas where alternative life capital could be beneficial to firms, policyholders and the economy?

Q5: How might increase flexibility in the use of alternative life capital affect the UK life insurance sector, including the structure, activity, and pricing of life insurance products?

Q6: Could more capital flexibility allow for more patient asset deployment and therefore result in more investment in UK productive assets by UK life insurers?

Approaches to capital flexibility

Q7: Are there any specific features of the structures described in this chapter that would be appealing to your business?

Q8: Are you aware of any other vehicles that have been used to access capital in other markets?

Q9: What is your view of the regulatory barriers to bringing in external capital to support a particular line of insurance business?

Q10: When deciding to access external capital, what are your key decision criteria?

Q11: Part of the reason for the success of SPVs in the GI market is that they allow investors to carve out specific risks that are uncorrelated to wider financial markets and with capped exposure. Is there investor appetite for exposure to life insurance risks, even if those risks may not be as uncorrelated to wider financial markets?

Risks to the PRA’s objectives and supervisory mitigants

Q12: What do you consider to be the key risks as a result of enabling greater flexibility in access to capital for life insurance business and how might they be mitigated?

Q13: Do you have any views on how the PRA should balance ease of authorisation against the intensity of ongoing supervision for alternative life capital funding structures?

Q14: Do you have any views on potential approaches for valuing risk transfer associated with alternative life capital funding structures?

Q15: Do you have views on the principles that are set out in this chapter? Are there others that should be considered?