PRA publishes SS5/24 on funded reinsurance following PS13/24

The Prudential Regulation Authority has finalised its funded reinsurance framework for UK life insurers with the publication of Supervisory Statement SS5/24 in 2024, following Policy Statement PS13/24. The statement sets immediate expectations for UK Solvency II firms and UK branches using funded reinsurance as cedants, tightening governance, modelling and contingency planning around a rapidly growing risk transfer channel.

Scope, timing and regulatory intent

SS5/24 was first published on 26 July and came into effect immediately, without any transitional period. The PRA states that the supervisory statement is relevant to UK Solvency II firms and to insurance and reinsurance undertakings with a UK branch when they hold, or intend to enter, funded reinsurance arrangements.

The PRA sets out expectations for insurers entering into or holding funded reinsurance arrangements as cedants, making clear that these expectations apply to UK Solvency II life insurers and UK branches that are considering or already holding such arrangements. According to PwC UK, the PRA is concerned that current growth in funded reinsurance transactions by UK life insurers, if not adequately controlled, could lead to a rapid increase of risks in the sector.

The PRA states that the expectations in SS5/24 supplement relevant requirements under the Solvency 2 framework and other existing PRA expectations that apply to firms' outwards reinsurance arrangements, rather than replacing them. Hogan Lovells notes that the principles underpinning SS5/24 build on the requirements of the Prudent Person Principle, anchoring the new expectations in existing prudential doctrine.

Structuring of funded reinsurance arrangements

SS5/24 sets explicit expectations on how firms should consider the structuring of funded reinsurance arrangements. The statement covers how cedants should approach key structural features when entering into or maintaining funded reinsurance, including how those features interact with their broader risk and asset strategies. However, the regulator expects firms to structure these transactions in a way that is consistent with the Prudent Person Principle and with the supplementary expectations now set out for outwards reinsurance.

What the regulator said

The requirement to provide a summary of board‑approved funded reinsurance limits in the Dear CEO letter brings the structuring question explicitly into board‑level risk appetite. Firms are required to summarise limits for individual counterparties, correlated counterparties and the aggregate funded reinsurance limit, which directly links transaction structuring to concentration and correlation controls. The PRA expects cedants to manage funded reinsurance as a continuing risk exposure, aligned with their broader outwards reinsurance risk management frameworks under Solvency 2 and existing PRA expectations. By requiring limits for individual and correlated counterparties as well as an aggregate limit, the PRA is explicitly tying ongoing risk management to counterparty concentration and correlation monitoring. This requirement means boards and senior management must not only approve current risk positions but also oversee how gaps to the new expectations will be closed.

Capital modelling and internal model expectations

SS5/24 covers the PRA's expectations for modelling the solvency capital requirement associated with funded reinsurance arrangements, bringing these structures firmly within the capital framework. The statement sets expectations on how firms should capture the specific counterparty and structural risks of funded reinsurance in their SCR calculations, in addition to existing Solvency 2 requirements.

The PRA requires insurers to document the level of confidence in their internal models' capabilities for assessing counterparty risk relating to funded reinsurance. According to Hymans Robertson, this documentation must be sufficient to allow effective support for management decisions relating to funded reinsurance, which raises the standard for model use and validation in this area. This sits alongside the broader requirement that SS5/24 expectations supplement existing Solvency 2 capital requirements and PRA expectations on outwards reinsurance, rather than creating a parallel capital regime.

Contingency planning and recapture

A central new prudential requirement in SS5/24 is the focus on recapture planning for funded reinsurance. Hymans Robertson reports that SS5/24 requires insurers to have detailed recapture plans, including a comprehensive step‑by‑step assessment of future outcomes under stressed scenarios.

Supervisory reporting and self‑assessment

The PRA sets expectations around SS5/24 through structured oversight measures. The regulator has imposed an immediate supervisory process through a mandatory self‑assessment and data request. This process requires insurers to perform a self‑assessment against the expectations of SS5/24 and to provide the results to their PRA supervisor by 31 October, according to PwC UK.

This self‑assessment requirement applies to UK Solvency II life insurers and insurers with a UK branch that are considering or already holding funded reinsurance arrangements as cedants, aligning the supervisory process with the scope of the statement. The immediate application of SS5/24 means firms must assess their current positions and practices against the new expectations without delay. Together, the self‑assessment, limits summary and remediation summary give the PRA an early view of sector‑wide funded reinsurance exposures, governance and implementation gaps. This means firms must interpret SS5/24 in conjunction with existing rules and supervisory statements on reinsurance, capital, governance and risk management.

The PRA also recognises that funded reinsurance can form part of a diversified asset strategy, so the new expectations are framed as tightening prudential safeguards around an accepted tool rather than restricting its use outright. Within that perimeter, SS5/24 increases the required standard for structuring discipline, ongoing risk management, capital modelling, recapture planning and supervisory engagement for funded reinsurance cedants.

The immediate application of SS5/24, coupled with the 31 October 2024 deadline for self‑assessments and remediation summaries, creates a near‑term implementation timetable that will shape funded reinsurance activity and oversight through the rest of the year.

--- Sources: https://www.bankofengland.co.uk/prudential-regulation/publication/2024/july/funded-reinsurance https://www.aoshearman.com/en/insights/funded-reinsurance-the-pras-final-policy-statement https://www.bankofengland.co.uk/prudential-regulation/publication/2024/july/funded-reinsurance-implementation-approach