Cross-border capital management structures have provided vital capacity to the pension risk transfer (PRT) market on both sides of the Atlantic in recent years but insurance supervisors in the US and the UK are now implementing stricter controls on these arrangements.
A recent report from Fitch Ratings, Global Insurance Regulatory Developments: 3Q26, highlights some of these measures – that are being implemented simultaneously across the US, UK, and offshore hubs – that are designed to tighten scrutiny on asset-intensive reinsurance (AIR), a capital management strategy used by some bulk purchase annuity writers.
In the UK, the Prudential Regulation Authority (PRA) has proposed aligning the counterparty default adjustment applied to funded reinsurance with the corresponding fundamental credit spread. The report says that the PRA estimates that this adjustment would raise the capital held for an average existing funded reinsurance transaction from 2%–4% to approximately 10%.
While the report explains that the regulator chose not to introduce explicit ceding volume caps at this stage, it noted that the PRA said that volume limits could be considered in future consultations following its 2028 stress test exercise if concentration risks persist.
While this step-change in capital intensity is unlikely to trigger downward rating pressure for UK bulk purchase annuity (BPA) writers, Robert Mazzuoli, Director at Fitch Ratings, noted that there may be some strategic shifts and market changes.
“We do not expect any rating pressure from the proposed increases in counterparty capital requirements for FundedRe transactions given the limited absolute impact on Solvency ratios and the generally sound capital levels of insurers in our rated universe. However, we expect BPA writers to adapt their business strategies. This will vary company by company and could result in a more selective approach to pick highly-rated reinsurance carriers, or lower new business volumes if margins are not satisfactory,” he said.
Parallel updates in the US reflect a similar supervisory approach. The National Association of Insurance Commissioners (NAIC) is advancing updates to the life risk-based capital (RBC) formula for year-end 2027. These changes will increase the recapture RBC factor applied to reserves ceded outside reciprocal jurisdictions, alongside revisions to recoverability risk calculations that account for counterparty financial strength ratings.
Other developments stateside might have an impact on the PRT market. The report mentions that the NAIC has also adopted new RBC factors specifically for collateralised loan obligations (CLOs), which will be effective at year-end 2026. CLOs are one of many private credit assets that life/annuity carriers can and do invest in thanks to their typically greater spread over corporate bonds; the updated framework includes an 11.77% thin-tranche surcharge on below-investment-grade broadly syndicated loan CLOs with tranche thicknesses of 4% or less. Updated treatment for collateral loans and structured credit investments, such as excluding self-liquidating asset-backed securities with embedded asset-liability duration mismatches from the bond definition, will further restrict the capital efficiency of high-yielding asset classes frequently paired with asset-intensive liabilities.
The report illustrates how offshore jurisdictions are adjusting their frameworks in response. The Cayman Islands has submitted an application for Qualified Jurisdiction Status (QJS) with the NAIC; if approved, QJS designation means that Cayman-based reinsurers would be able to work with reduced collateral requirements when transacting with US cedants, which would serve as a potential pathway toward reciprocal jurisdiction status (something that Bermuda already enjoys). Meanwhile, the Bermuda Monetary Authority is consulting on a phased resolution framework for commercial insurers and ‘internationally active insurance groups’ to enhance crisis management powers.
The likelihood that this transatlantic tightening of regulations will permanently end regulatory capital arbitrage is low, but Mazzuoli expects some level of adjustment.
“The proposed measures by the regulators in the UK, but also the US, will reduce the regulatory arbitrage opportunity, but are unlikely to fully eliminate it. Having said this, the differences are small enough to grant Bermuda reciprocity, and the Cayman Islands are moving in the same direction. The Bank of England is also considering alternative risk transfer mechanisms to further reduce the relative benefits of the offshore centres,” he said.
In continental Europe, the European Insurance and Occupational Pensions Authority (EIOPA) is finalizing technical guidelines ahead of the Solvency II Review implementation in January 2027. The report says that EIOPA has also focused on proportional reinsurance treaties with loss limits or sliding-scale commissions, requiring ceding companies to perform quantitative tests to prove that capital relief corresponds to actual risk transfer. While the EU has only the Netherlands and Germany offering active PRT markets, nonetheless, EIOPA’s tighter stance on structured reinsurance and risk transfer validity will directly impact how insurers in these jurisdictions price large-scale buy-out transactions and manage capital relief.
Elsewhere, the report also highlights the asset-intensive market in Japan. While not a PRT market per se, AIR deals between Japanese cedants and foreign reinsurers have been on the rise in recent years, thanks to Japanese insurers seeking to offload legacy interest rate risk under the implementation of the country’s new Economic Value-based Solvency Ratio regime. In response, Japan’s Financial Services Agency has issued updated supervisory guidelines requiring enhanced scrutiny of reinsurer counterparty risk, collateral adequacy, and stress testing around potential recapture scenarios, further reinforcing the global supervisory trend toward tighter cross-border governance.
While the Fitch report details individual regulatory actions in isolation, taken together, these updates point to a broader commercial impact. By addressing counterparty risk, asset quality, and cross-border reserve cessions simultaneously, supervisors are raising the cost of capital associated with third-party reinsurance.
So, BPA writers have three options going forward regarding their PRT activity. One is to absorb this higher cost of capital, another is to pass it on through higher premiums, or a combination of the two. While BPA writers increasingly compete on non-price factors, such as member experience, administrative capabilities and brand reputation – not to mention that higher-yielding private asset investment strategies support pricing flexibility – rising regulatory capital costs are difficult to absorb entirely.
“Price is an important factor, but certainly not the only one. [But] if the cost of capital to be active in the PRT market rises, and assuming current margins reflect the high level of competitiveness, then some of that is likely to be compensated by higher prices,” said Mazzuoli.
