A year ago, the Bank of England issued a consultation paper that proposed reforms to the UK Insurance Special Purpose Vehicle (UK ISPV) regulatory framework, through a combination of changes to Prudential Regulation Authority (PRA) rules, supervisory statements and statements of policy.
The consultation paper acknowledged that “The UK ISPV regime has seen limited uptake since its introduction in 2017,” and “Feedback from market participants has been that the UK regime does not positively support the establishment of UK ISPVs.”
Exciting times for property and casualty and catastrophe bond investors and issuers, then, as this particular reform was specific to those markets – which meant that the life insurance industry did not receive its invite to the party.
However, change has now appeared on the horizon. In September this year, Vicky White, Director, Prudential Policy at the PRA, gave a speech at the 30th Annual Bank of America Financials CEO Conference in which she said:
“Developing alternative life capital options in a way that preserves protection of policyholders, enables access to cheaper or more patient capital and supports growth, will require more focussed attention…One such potential alternative that may have a role to play is the insurance special purpose vehicles (ISPVs) framework…The PRA will therefore continue to work with industry and HMT on further reforms and expects to publish a discussion paper on the topic of alternative life capital options which will consider how the ISPV framework (or other structures) could be made accessible to UK life insurers.”
The PRA has now delivered on that promise with the publication of DP2/25 – Alternative Life Capital: Supporting innovation in the life insurance sector, which 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.
While this is only a discussion paper for now, the PRA’s intentions clearly make for encouraging reading for the capital markets.
“The acknowledgement by the PRA that the UK life market could benefit from alternative financing options is undoubtedly a win for the space,” said George Belcher, Partner at Mayer Brown in London.
The paper identifies five sections where the PRA is seeking answers to questions: Identifying the need for capital in the UK life insurance sector; Risk transformation examples; Striking a balance between cedants and capital providers; Authorisation and supervisory safeguards; and Alternative life capital principles. Each section contains an array of questions, which interested parties need to answer by Friday 6th February 2026.
As with any regulatory development, particularly when it comes to the life insurance industry, there are many things that the PRA needs to consider.
“The obvious point is that there are also clear differences between life/longevity risks and natural catastrophe risk for these purposes, including that the relevant longevity liabilities already exist, they may not readily be capped, and often much of the supporting capital already exists in the form of the (former) pension scheme assets,” said Belcher.
“The PRA will need to define ‘fully funded’ in the context of longevity risks, consider the extent to which the cedant benefits from a matching adjustment (MA) in respect of its reinsurance asset with the ISPV, consider how investors may ‘collect’ on the principal investment ahead of expiry of the underlying/reference risks – for example, via development of ‘put’ options and a secondary market – and make technical amendments to the Risk Transformation (Tax) Regulations 2017 to make clear that such risks are subject to the appropriate tax treatment,” Belcher added.
Where there is a will, there is a way – usually. And there is, of course, precedent in other jurisdictions. The US has an active – and growing – life reinsurance sidecar market, which grew to total ceded reserves of nearly $55bn in 2023 from approximately $17bn in 2021 according to an AM Best special report published earlier this year.
A feature of the US market is the increasing involvement of alternative asset managers. The trend is a well-established one stateside, with these investors participating in the US life insurance industry either by merger (Apollo and Athene for example), investment partnerships (Resolution Life and Blackstone, for example) or Bermuda-domiciled reinsurers for asset-intensive life reinsurance transactions.
These behemoth investors will doubtless be watching developments with interest, as will traditional asset managers. But multiple industry commentators have suggested that it is inevitable that the capital markets will have to play a greater role in longevity-linked assets and that the UK is now seriously looking at this as something of an early Christmas present.
“While there are many regulatory and other issues that need to be resolved, overall, however, this appears to be an important first step on what many see as a necessary journey – i.e., the mutualisation of society’s growing longevity exposure with the international capital markets,” said Belcher.